work: Buying vs. renting
"Should we continue renting or go ahead and buy?"
That's the question hundreds of thousands
of Americans ask themselves every year.
It's not an easy one to answer.
Emotions, family and personal reasons all come into play in any
No one knows what the future holds
for you, your family, your job or your finances. But we can help
you understand what you're going to encounter when you embark on
the sometimes-difficult journey toward the American Dream of owning
Economic differences between
renting and owning
If you're looking for the best return on your money, historically
you're better off investing in the stock market than buying a house.
Primary homes generally don't earn the investment return of financial
instruments such as mutual funds. While the stock market's long-term
average rate of return is in the range of 8 percent to 10 percent,
housing has appreciated on average in the low- to mid-single digits
for many years. That means you shouldn't buy solely to generate
an investment gain.
On the other hand, Uncle Sam helps
out by letting taxpayers deduct part of the mortgage interest and
real estate taxes they pay each year. Borrowers get the benefit
only if they pay enough in one year to exceed the standard deduction.
But that usually happens, especially during the first few years
of a mortgage when most of each payment goes toward interest rather
By the numbers ...
Say someone with gross annual income of $50,000
bought a home using a 7 percent, 30-year mortgage of $150,000 on
Jan. 1, 2002. The monthly payment would be $998, excluding taxes
and insurance, and this year, that borrower would pay $9,585 in
interest. If he didn't have the mortgage, he would take a $4,700
standard tax deduction on his 2002 tax return (assuming he was a
single filer). But by itemizing his mortgage interest, he would
have $4,885 more to subtract from his income.
Sunny side of homeownership
Owners enjoy other benefits, too. They build equity over time as
home values rise and their mortgage balances shrink. They also don't
have to worry about their housing costs shooting through the roof
because mortgage lenders can't boost borrower rates and payments,
unless those borrowers have adjustable-rate mortgages.
Cloudy side of homeownership
When something breaks at an apartment, it's the
landlord's problem. When your name's on the deed, it's yours. Someone
who throws every penny into a down payment just because homeownership
sounds like a good idea is taking a big risk because there's no
money left to fix leaky pipes or buy a new air conditioner.
Potential buyers may want to hold off for other
reasons. Workers on shaky ground with their employers or those who
don't think they'll be able to find jobs nearby if their firms go
belly up might want to wait on getting mortgages. The same goes for
people who plan on leaving a job soon. The monthly payment isn't the
only obstacle for this kind of customer. Closing costs and other home-buying
fees, as well as the commission that most owners end up paying to
real estate agents when they sell their homes, add up. People who
have to sell after living in one place for only a short time can end
up in the hole on their investments.
Explore all the options
Some middle-ground approaches to homeownership
blend elements of buying and renting. Some of the more popular loan
types are seller financing, "lease with an option" and
"contract for a deed" plans.
With seller financing, the seller actually assists
the buyer in purchasing the home, by "lending"
the buyer either a portion of the amount to be financed
or the entire amount.
Let's say the buyer and seller agree
on a price of $150,000 for the house. In many cases
a lending institution would require a 20-percent
down payment -- $30,000 -- and give the buyer a
mortgage for $120,000. But if the buyer has only
$15,000 cash, the seller could "take back"
a second mortgage for the $15,000 the buyer is short.
The buyer makes payments on the first loan to the
bank and the second loan to the seller.
Another example of seller financing: If the sale price
of the home is $150,000 and the buyer has only $15,000
for a down payment, the buyer gives the $15,000 down
payment directly to the seller who agrees to carry
the entire mortgage amount of $135,000. The buyer
would make all payments directly to the seller.
Seller financing reduces the cash needed to get
into a home and could dramatically reduce closing
costs. Often the seller will be more flexible
in accepting an underqualified buyer.
Con: The seller determines the interest
rate for that portion of the mortgage being carried,
and it usually comes with a higher rate and a
shorter term. Perhaps most importantly, it very
often comes with a balloon payment. This means
that monthly payments would be computed as though
the mortgage was to continue for, say, 30 years,
but at the end of five or 10 years the entire
remaining balance has to be paid in one lump sum.
That normally requires refinancing at that point,
when rates could either be lower, higher or about
the same, or selling the house to meet that balloon
Lease with an option
In a lease with an option, the buyer leases a
$125,000 home from the seller for 12 months at $1,200 a month, with
$200 a month going into a savings account for a down payment and
$1,000 going to the owner. Before moving in, the would-be buyer
pays maybe 4 percent, or $5,000, of the purchase price upfront that
goes toward the down payment. At the end of one year, the buyer
gets the home with $7,400 down (his $5,000 upfront plus his savings
account) and a regular loan from a bank that pays off the seller.
good for people who don't have a lot of cash, plus you get to
"wear" the house before you buy it.
Con: The seller owns the home during the lease period.
Contract for a deed
In a contract for a deed, the buyer arranges
a contract with the seller. The buyer makes payments to an escrow
agent, who holds the deed to the property. After 180 months or some
other term of payments to the escrow agent, the seller tells the
escrow agent that payments have been made, and the escrow agent
gives the buyer the deed. No financial institution is involved.
Pro: It reduces
the closing costs.
Con: A buyer who defaults before fully owning a property
can be treated like a tenant and evicted.