Rent or buy? Things to consider

Posted by on July 10, 2012 @ 11:00 am in Personal finance

Over the weekend, my husband and I signed a contract to buy a new house. After months of indecision—and driving our realtor crazy—we finally committed. (Now, if we could just decide on the color of the knobs for the bathroom cabinets…).
Buying a house is obviously a major decision with significant financial considerations. With interest rates at historically low levels, it might be a good time to buy.

Not sure whether to own or rent? Consider a few factors, and notice that these concepts are very similar to how you might think about your investment portfolio:

Do you have a long-term perspective? If you think you may move soon, upfront expenses such as closing costs and other fees might make renting a more prudent financial choice. Just like it might not be a good idea to purchase and quickly sell an investment since the transaction costs and tax consequences can outweigh the benefits, it might not make sense to purchase a home if you don’t have a long-term time horizon.

Do you know the risks of investing in the housing market? Unless you know something that the rest of us don’t, it’s unlikely that you’ll be able to time the bottom of the market and get in at exactly the right time. It’s helpful to have a sense of sales trends for your area, but you should also be comfortable with the idea that the value of your home might not appreciate rapidly, or at all. As with your investments, if the thought of your home losing value is scary, this is something to reflect on before you proceed.

What about costs and taxes? Property taxes vary quite a bit from region to region and can add a significant amount to your monthly payment. On the flip side, depending on your tax situation, you may be able to deduct the interest income and property taxes, reducing your annual tax bill. Just as with your investment portfolio, the idea is to keep the big picture in mind. Consider all costs before making a purchase.

Of course, purchasing a home isn’t a strictly financial decision. As my husband and I discovered, it was important to find the right neighborhood and a house that felt like somewhere we could envision ourselves for a long time.
If you’ve made the decision to enter the housing market for the first time, here are a few suggestions that my husband and I found helpful.

1. Determine your budget In addition to your monthly mortgage payment, taxes, insurance, utilities, homeowner association fees, and other expenses can add up quickly. Once you determine what you’re comfortable paying on a monthly basis, determine what mortgage amount you can handle. There are lots of online tools and calculators that can help give you a sense of how much house you can afford; just keep in mind that these tools can be overly simplistic. And, don’t forget that owning a home will likely bring unforeseen expenses; fixing a leaky roof, replacing a furnace (or buying the ride-on lawnmower that my husband has convinced me that we need.)

2. Know your priorities For my husband and me, finding the right home was about tradeoffs. Have a sense of what’s most important to you, and where you’re willing to compromise: price, location, layout, lot size, finishes, etc. We came up with a rating system that we applied to each house that ultimately helped us make a decision.

3. Consider your options There are so many options when it comes to financing a home: 30, 20, and 15-year fixed, 5-year arm, FHA (Federal Housing Administration), etc. Depending on your time frame for staying in the home, you may also want to consider paying points, which would reduce your interest rate.

4. Compare lenders Before you get too serious about a house, make sure that you’re qualified for a loan. It’s worth your time to compare the rates and fees from a few lenders to be sure you’re getting a good deal.

5. Be careful with your credit Since lenders will check credit immediately before closing, avoid taking actions that could impact your credit score, such as opening or closing a new credit account or making a major purchase on credit.

My final suggestion is to enjoy the process. That’s easier said than done. This will likely be the largest purchase you ever make, and it will be stressful. But you’re purchasing your home, and investing positive energy in the process is a great way to begin filling your home with good intentions and good memories.

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