It is an American Dream to buy your own home.
However to make the decision on buying vs. renting is always
difficult. They both have long financial impacts. Since it
is one of the major decisions of your life you need to arm
yourself with knowledge.
Rent vs. mortgage payment
One of the most common mistakes that people do is compare
paying rent to a mortgage payment. However a mortgage is only
a part of the total payment you make towards your house. You
need to pay – insurance, maintenance and property tax.
Maintenance
As a renter, when you come across some breakage or maintenance
issue, you just let your landlord know and he gets it fixed.
But, when the deed has your name on it, maintenance becomes
your problem. You cannot buy a house on a shoe string budget.
You need to factor in maintenance costs. Most experts agree
that $100 per month on maintenance is a minimum figure that
you should keep aside for any unforeseen repair work.
Extra payments such as property tax and insurance
Another cost that most people forget to take in account before
purchasing a house is the additional payment such as down
payment, closing fee, inspection fee and monthly payment towards
insurance and property tax. Experts recommend that on average
you should add another 40-45 percent to your monthly mortgage
cost to get a more realistic total monthly cost.
We are not required to pay any property tax while renting.
Down payment vs. Private Mortgage Insurance and higher interest
rate
When you purchase a house you will be required to make a down
payment. Most experts suggest that you should make at least
a down payment amounting 20% of the cost. If you are unable
to do so, you attract a higher interest rate for your mortgage
and you will be required to pay for Private Mortgage Insurance.
Typically this is about $45 per $100,000 of mortgage. You
do the math! PMI will cost you, so don’t make the error
to ignore such cost.
In comparison to that we only make a small deposit with the
landlord while renting.
Extra expenditures – furniture,
lawn, patio
The space differential between a rented apartment and a house
would ask for new furniture. And, that can be expensive! Not
to mention the cost that would come from purchasing the patio
furniture, snow blower, or lawn mower, etc.
Tax Deduction
A lot of times the decision to buy the house is made completely
on the basis of a tax deduction that one would receive. However,
they forget to compare the price differential been the tax
deduction received and the overall cost of owning the house.
You don’t always save money via a tax deduction. Sometimes
the amount of the tax deduction does not cover the additional
cost that is required to acquire a house.
You do not receive any tax deductions when you rent.
FICO score
Before you make any decision consider your FICO score as that
would determine if you are eligible for a mortgage as well
as determining the interest rate. The lower your FICO score
the higher your interest rate. That would mean a difference
of hundreds and thousands of dollars over the lifetime of
the loan. Therefore, if you currently have a bad credit score,
try first to remedy your credit before you consider buying
a home.
If you were renting then the FICO score would only make a
difference in the amount of deposit you need to make and not
the rent you pay per month.
Equity
When we are renting we do not get any equity built up where
as from the first time you pay a mortgage you are building
equity in terms of your house.
