Your new home -- rent vs. buy?
Cynthia E. Brodrick

Everyone needs a place to call home sweet home. You have two options when financing your domicile: rent or buy, unless you don't mind the rain dripping off your nose. The main difference between renting and buying is who gets your check -- a landlord or the bank. Weighing costs will be a big part of your decision, but there are other factors to consider.

Buying a home seems a natural progression from renting. And perhaps you're tired of the apartment life. However, there are times when a homeowner may be facing a life change that will have them thinking of renting again. We consult the experts and take a look at what you need to consider when you're looking for a new place to live.

Financial short term

Advantage: Renting

Housing is an expensive part of your budget, so you'll want to weigh the money issues carefully. But it's not as clear cut as you might think.

"Buying is more expensive in the beginning," says Ed Sacks, renting columnist and author of "Chicago Tenants' Handbook" and "Savvy Renter's Kit." He's referring, of course, to the high cost of actually purchasing a house. You can face thousands in down payment and closing costs. However, there are VA loans and FHA loans that make it possible for folks, even with low savings, to get started on their way to the American Dream of homeownership. Sadly, those special loans won't do much about the closing costs.

The renter just has to sign a lease and move in. And after that, a renter's financial commitment stays simple.

"Another benefit of renting is that it eliminates the unexpected, the need for a reserve fund," explains Sacks. If you're young, traveling and carefree, you might appreciate the landlord taking care of the repairs and major maintenance of your abode. As a renter, your responsibility is finished after signing that monthly rent check.

Meanwhile, the homeowner is crying "poor poor PITI-ful me." He is paying PITI – principal, interest (on the mortgage), taxes and insurance. Also the homeowner has to replace his own refrigerator, get the septic lines replaced and patch the roof. Besides the cost, this can be a major time drain and aggravation. There is a reason a house is called a money pit.

However, in comparable houses in the same area, this mortgage payment can be about the same as rent. And that monthly payment for a homeowner is not as painful as it first seems. Next April 15, the homeowner gets to write that mortgage interest off on his income tax. "As long as you can handle the cash outlay, the costs are defrayed by the government," explains Richard J. Roll, president of the American Homeowners Association in Stamford, Conn.

Roll argues: "Even though the costs of homes are rising, the cost of owning a home after taxes is generally less than rent."

Sacks counters: "As a rule, renting is less expensive than owning. Looking at PITI vs. rent on a cash flow basis, you're way ahead on rent, generally speaking."

Well, they certainly didn't clear that up. What they mean is that you'll have to check out and compare rental prices vs. housing prices in your own town. There are just too many variables to be definitive one way or the other.

Financial long term

Advantage: Owning

The financial long run does favor the homeowner. Owning a house is a good investment, whereas with renting, you're waving bye-bye to your money each month. For example, after 10 years of renting, you don't have a lot to show for it except a bunch of dust bunnies under the fridge. After 10 years paying a mortgage, you end up owning something a little more substantial (or at least a portion of it) that you can sell off later. Additionally, you could end up with a bonus if the house increases in value.

Homeownership also has the advantage with monthly payments over time. Usually rent goes up over the years, and the renter has no control over this. For the homeowner, property taxes and insurance could go up ... but they could go down as well. Additionally, while part of a homeowner's monthly payment is interest, it can be possible to refinance later at a lower rate, again bringing the payment down.

For the most part, a homeowner's monthly payments do not change as significantly as rent. So 10 years from now the renter's payments will definitely have increased while the homeowner's payments won't have changed much and may have gone down.

Credit considerations

Advantage: Renting, since this issue can be a hurdle to owning

Austin, Texas Realtor Pat Van Hoy is a firm believer in buying a home. She sums it up: "If you qualify for a mortgage, there's no reason you shouldn't buy."

Aha, that qualifying thing she mentions can be another hurdle. Few people can buy a house outright, so they need to find someone willing to loan them the balance. The better your credit rating, the easier it will be to get out of that rental.

But with bad credit, the debate between owning and renting might be a moot point. With a negative credit report a person can't get a mortgage, so renting is their only option, explains Denny Snowden, president of the National Association of Residential Property Managers.

Van Hoy disagrees. She says more folks with mediocre credit ratings can buy a house than realize it. She explains, "With the multitude of flexible mortgage and buyer assistance programs available, there's probably a mortgage out there for everyone."

Flexibility

Advantage: Depends on what you want freedom to do

There is one time that buying is definitely not the best option. The renting and owning experts are in agreement that when you're in transition, renting is the best economical move.

"If you're moving or not sure where your career will take you, it's better to rent," admits Roll.

"It's a heck of a lot easier to move at the end of a lease than to put a house on the market," says Sacks.

"If you buy a house, you're kinda stuck with it," adds Snowden, who lives in Colorado Springs, Colo., a "forced-move" military community.

When moving to a new area, you want to check out the neighborhoods and figure out if the move was a good idea. So while renting may be costly for a little while, it can save you from throwing away a lot more money if you quickly snatched up a home and then regret it.

Some professions require a lot of relocating, especially in the military. When a family moves to an area and knows they're only going to be there a couple years, it's really not a wise economic move to take on the heavy transaction costs of buying a house, then turning around and selling it again quickly.

If your life is in transition in other ways, then sticking with a rental property is still a good idea. "Renting allows people who are living together to make serious decisions without the commitment of buying a house," Sacks explains.

On the other hand, homeownership can offer you another type of freedom -- you can do whatever you wish with your own home. Painting, adding a deck, hanging shelves and other ways of modifying the house to your lifestyle are easier when the house is yours. Sure, you can decorate with a rental property, but you don't want to lay out big bucks to remodel a bathroom that belongs to someone else.

"You tend to improve your house based on tastes, lifestyle, kids," says Roll. "The psychological value of improving your home the way you want it is an immeasurable benefit."

Values

Advantage: Owning, but can depend

When choosing between renting or buying, you need to define your values as much as look at your savings account. Consider what a home means to you and your family:

• Is it the center of family life or just a stopping place?

• Consider the importance of privacy, community and prestige to your family.

• How much time are you willing to devote to repairs or upkeep?

• Look at what stage of life your family is at now and plans to be at in the next 10 years.

Some people enjoying being active, responsible citizens of their communities. It's been shown that homeowners are more likely to vote and put down roots in a town. Homeowners are more likely to take pride in their yard and house's appearance.

Sacks admits to another advantage for homeowners: "There's the security of knowing the landlord won't throw me out. No one's going to interfere with me."

The "American Dream" will continue to include homeownership, and with current low mortgage rates and a booming economy, it seems everyone should buy. But there will also always be reasons to rent. Now you can make the decision for yourself.

-- Posted: Aug. 12, 1999