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LESSON 1: BUYING VS. RENTING
(continued
from previous page)
Would-be buyers need to consider the downsides of ownership,
too. 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!
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Potential buyers may want to hold off for other
reasons, too. Workers on shaky ground with their employers or those
who don't think they'll be able to find jobs nearby if their firm
goes 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 amount of
time can end up in the hole on their investments.
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. Here's an example of each:
Seller financing -- Buyer
buys $100,000 home by taking out an $80,000 bank loan, putting $5,000
down and getting seller to "carry back" a $15,000 second
mortgage. Buyer makes payments on the first loan to the bank and
the second loan to the seller. That second mortgage from the seller
usually comes with a higher rate, a shorter term and a potential balloon
payment. Or, the seller can hold the entire mortgage and the buyer
makes payments directly to the seller.
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Reduces
the cash needed to get into a home and could reduce closing
costs. |
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There
are two monthly mortgages payments and the seller determines
the interest rate for the second loan. |
Lease with an option --
Buyer leases $125,000 home from 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 up front that
goes toward the down payment. At the end of one year, the buyer gets
the home with $7,400 down (his $5,000 up front plus his savings account)
and a regular loan from a bank that pays off the seller.
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Good
for people who don't have a lot of cash, plus you get to "wear"
the house before you buy it.
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Seller
owns home during the lease period. |
Contract for a deed --
Buyer arranges contract with seller. Buyer makes payments to escrow
agent, who holds the deed to the property. After 180 months or
some other term of payments to the escrow agent, seller tells escrow
agent that payments have been made and escrow agent gives buyer the
deed.
Bank never gets involved.
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Reduces
closing costs. |
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Buyers who
default before they fully own their properties can be treated
like tenants and evicted. |
These unconventional purchase methods, while potentially more rewarding
than renting, can be risky. But they can also help people who either
don't want conventional
mortgages or don't qualify for them.
| If
you're nervous after reading all of this, good. Purchasing a
home is usually the largest financial commitment a person will
make, so no one should go out and buy a home on a whim. But
if you're ready to take that step and you've considered all
the pros and cons, read on! |
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