Owning vs Renting a Home

Painting your rental apartment walls mango or lime green or some other trendy color may put your security deposit in jeopardy. But taking that same sense of color style and applying it to a tired room in an old house you just purchased is called "sweat equity." That has a nice ring to it.

Reasons to Rent

There is definitely an upside to renting:

• Flexibility. Check out neighborhoods if you are new to town or are researching where you want to buy. By renting you can test an area without committing to it.
• Uncertainty in your career. If you think you might need to move in the near future, or are mulling job changes that span several areas of town or are located elsewhere in the country, you might want to rent, since buying ties you down to a greater extent.
• Uncertainty in income. If you expect a pay hike or pay cut in the near future, that can change your borrowing ability as well as impact your ability to pay a mortgage.
• Got bad credit? Creating a history of on-time rental payments can help you build the sort of credit you need to qualify for a mortgage.
• No maintenance. When the pipe leaks under the sink, you don’t head to Home Depot, you head for the telephone and call the landlord.
• Incidental expenses. The landlord pays for many utilities such as water, sewer, garbage, and in some cases heat and hot water as well.
• Not subject to downward movements in home prices.  If we are in a housing bubble, you don't lose money.  (On the other hand, if house prices keep going up, you lose money).
• May be less expensive than owning.  If the cost of renting is less than the cost of buying, you can use the excess money for other purposes, such as investment or furniture.
• If you are in a market with declining real estate values.  If home values in your area are dropping you may get a better deal on the home if you wait.   Let someone else take the loss instead of you.

But there is a downside too: You may have no control over the fluctuation of your rent, a big budget item that can change often. Long-term budgeting becomes more difficult.

Reasons to Buy

There are upsides to buying a home:

• Equity. When you pay rent, you don’t own anything. When you pay a mortgage, you increase your degree of ownership in your home with every payment. Also, you can borrow against your ownership (or equity) in the home to pay for major purchases, refinance your home at favorable rates, or, once you’ve paid the entire mortgage off, borrow to fund major purchases like a second home or your child’s education.
• Creative control. So, you like dozens of pictures on the wall? Well, hammer away — they are your walls now. Go ahead and paint them mango! Wish you had another room? Go ahead and add one.
• Maintenance choices. If you live in a house, you can decide how to approach maintenance, either doing it yourself or picking your own contractor. If you live in a condominium or homeowners’ association, you may pay a monthly fee to have maintenance work covered by the association’s contractors.

While a home is a good investment — and let's face it, you have to live somewhere — many financial experts caution against purchasing a home simply as an investment. Historically, the real estate market increases have been slow and steady, not meteoric -- depending on where you live. The stock market, on the other hand, has generated returns of between 8 and 10 percent pretty steadily for decades.

Is Renting Cheaper?

That depends on your market and where you choose to live. One financial planner said he has advised some potential buyers to wait. In areas where home prices have skyrocketed and the rental market has flatlined, young buyers are better off renting and putting money aside for the purchase when (or if) the market corrects itself.

And consider whether or not you like to do maintenance. Homes cost money.  Appliances break, roofs leak, and you are the lucky soul who gets to pay the bill. If you are renting, landlords pay the plumber and water/sewer and garbage bill to go along with it.

But, of course, there is that tax break. Depending on your tax bracket, a first-time purchaser’s 1040 tax deductions heavily subsidize housing expenses in the first few years. Since a 30-year fixed mortgage requires high interest payments — all deductible — at the beginning of the loan, you deduct a larger share of the mortgage cost early in the life of the loan.

The Rent To Own Alternative

A relatively uncommon, but viable, way of obtaining a home is rent to own (aka lease/purchase). This alternative is normally used when a buyer is unable to secure conventional financing, yet wants to build equity now. Here's how it works:

A home is made available via a standard lease with one important addition. Included is an option to purchase that home at a specified price over a specified time period (usually one or two years). In order to acquire that option, the renter/buyer must pay a one time, NON REFUNDABLE, fee called the option consideration. The exact amount is negotiable, but it is usually ranges from 2.5 to 7% of the purchase price. A fair contract will credit the buyer 100% of that option consideration upon closing of the sale. Furthermore a negotiated percentage of all rent payments should be applied toward the purchase price of the home.