Mortgage Rate News

One of the biggest rivalries in the money world is the renting vs. buying smackdown. The argument against renting is, of course, that it is a waste of money: You are throwing your money down a hole and you won’t get any of it back. At least with a mortgage, you can take a tax deduction for your mortgage interest. And, the argument goes, you get a return on your investment since real estate appreciates.

Before you decide that you have to buy, though, it is important to consider whether buying really is better than renting in your situation. Here are some things to think about before you commit to buying a home:

• True costs of home ownership: It is important to realize that home ownership is about more than your home mortgage loan payment. Rather, the true costs of home ownership include property taxes, maintenance, utilities and insurance. If the costs of renting are much lower than owning a home, you might consider renting for a little longer.
• Affordability: You also have to decide whether you can truly afford a home. Even though you might be able to get a good deal, if you can’t actually make the mortgage payment long term (you can practice making your mortgage payment), then you could end up in trouble.
• Length of time in the home: Depending on how long you plan to stay in the home, its appreciation and how much equity you build, you will have different experiences with the profitability of your home. It is also worth noting that if you keep a home mortgage loan for 30 years, by the time you have paid the interest, chances are that even if the home has doubled in value, you will still be behind.

If renting does cost significantly less than buying, and you are able to invest the difference, you might be better off. My husband and I bought our home because we knew that we would be here for about 6 years. We figured, using an amortization table, that even paying interest, we could break even at worst, due to the fact that the housing market in our area has remained reasonably stable. So, essentially, we are paying $0 for housing. Plus, we should have enough equity built up so that we can make a larger down payment — assuming we buy again.

The New York Times has a cool renting vs. buying calculator that allows you to easily see whether you might actually be better off renting.

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Right now, it’s all about the deals on the housing market. There are a number of incentives, not to mention the great deals on home prices as the market continues to look for a bottom. And, if you are willing to buy a fixer-upper, you can really make a killer of deal. In fact, many people prefer to buy fixer-uppers and put in a little sweat equity. However, it is important to be careful when purchasing that fixer-upper. You want to be sure about what you’re getting into. Real Estate Pro Articles offers this insight into buying a fixer-upper:

Homes that need work do cost less, but they cost less for good reason. Sometimes they’re not reduced as much as they should be, considering how much work they require. Don’t buy any fixer upper without having a thorough inspection done so that you know exactly where you stand. Be aware that some problems may not come to light until after you start fixing things up.

When we were looking for a home a couple of years ago, my husband and I considered a fixer-upper. However, we lack the necessary skills and knowledge to effectively fix up a house. By the time we hired people to do the work, we found that we might as well just buy a home that didn’t the upgrades. And, while my husband could probably have learned how to do some of the work, the fact is that he is a Ph.D. student with very little time. In the end, between our two schedules, it was impractical to try a fixer-upper. Others, though, are talented builders and can fix up homes for a relatively small cost.

Before you take the plunge with a fixer-upper, make sure that you understand what you are getting into. Get a realistic view of the costs involved, as well as the labor. You want to make sure it is truly worth it before you buy a fixer-upper.

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In my neck of the woods, I’ve seen an increase in rent-to-own signs. Selling is difficult right now, in part because mortgage lenders are being stingy with the qualifying. Would-be home buyers cannot get approved for home loans, and that means that sellers are not able to unload their homes. Rent-to-own provides a nice compromise.

What is rent-to-own?

When you enter into a rent-to-own agreement, you agree on a possible purchase price, and a period of time in which you are renting. You pay an upfront amount and extra rent. This money can be used as savings to use as a down payment on the home in 12 to 48 months, or whenever the agreement specifies.  CNN Money has an example of how a rent-to-own agreement might work:

For example, if they buy a $200,000 home, paying $5,000 up-front and a rent premium of $400 a month on top of their $1,000 market rent, they’ll have $9,800 saved after one year and $19,400 after three.

As you can see, after three years, there is nearly enough saved for a 20% down payment on the house. Plus, if the would-be home buyer has been working carefully on his or her credit profile during that time, it is possible to get good mortgage terms. This also works out for the home owner, since it provides the seller with enough each month to cover the mortgage, and gives him or her a willing buyer in a set amount of time.

Things to watch out for with rent-to-own

There are drawbacks, of course. It is important to be careful when entering into such an agreement. Make sure to have a trusted legal representative look it over to make sure you are protected. These agreements should specify what happens in a number of scenarios, and you should be prepared for the following possibilities:

• Falling behind in your payments: If you fall behind in your rent payments, you may lose the money you have put in upfront and as extra savings.
• Failure to receive financing: If you still can’t get financing after your rent-to-own efforts, you may lose your investment. However, you can actually arrange to have some of your money returned in such an event. Make sure this provision is included.
• Scams: Realize that you might get scammed. Scammers abound right now. In some cases, rent-to-own “sellers” are actually in foreclosure. They take your money, and eventually the home is repossessed and you are left empty-handed.

And, of course, there is no guaranty that home prices will rise. You might end up buying a home that is worth less than you paid.