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Rent or Buy?
The idea of buying a house or an apartment in your first years out of college may sound ludicrous. Nevertheless, we keep hearing that if you're paying rent you "might as well be throwing money out the window." So how much would we really save if we were to...gulp...buy a house?
You see yourself bumping up what you think you can afford because you're never happy with what you first see. -Alexis Boyle, 24
1) Buyers generally spend more cash up front than renters. Renters may have to hand over as much as three months' rent when they first sign a lease (first and last months' rent, plus a security deposit in the amount of one month's rent). Buyers, though, need cash for a down payment (a percentage of the total cost of the property), in addition to closing costs and fees (e.g., a brokerage commission; city, county, and state transfer fees; and title insurance).
2) Next come the monthly bills: Renters pay rent (which sometimes includes utilities), while buyers pay their mortgage payments (i.e., they pay back the loan they took out to buy the house, plus interest). The tricky thing here is that even if the buyer's mortgage payment is higher than the renter's rent, the buyer may end up spending less. That's because at tax time homeowners can claim deductions for real estate property taxes and for the interest paid on their mortgages.
3) And what are the two parties left with? For buyers, it's equity--i.e., they're purchasing something, and they have that "something" to sell at the end of the day. Also, their home (we hope) appreciates in value with time. For renters, well, perhaps there are some fond memories to walk away with....
So now we can identify the costs, but what does it all mean?
A case scenario
Given those numbers, Quicken calculates that Billy would save over $20,000 in three years if he bought a place instead of rented. His mortgage payments would be $1,500/month (versus his $1,200/month rent), but he'd save $400 each month in taxes, and he'd be building up equity in his home. Most likely, the longer Billy lived in his home, the greater his savings would be.
Furthermore, you have to be happy with "how much" home you can afford. Depending on where you live, it's possible that you can afford to rent a nicer place than you can afford to buy. When Alexis Boyle, 24, began looking for an apartment to purchase in Boston, she had her sights set on a one-bedroom place in the well-to-do Back Bay neighborhood. "I had figured out this price that I thought I could afford and then I realized there was no way I'd ever want to live in a lot of those places," she says. "You see yourself bumping up what you think you can afford because you're never happy with what you first see." Boyle says she received the best advice from her mother: "She just wanted to make sure that I knew what I was doing. She said I didn't want to be 'house poor,' meaning you've made this good investment but all of a sudden you can't go out to dinner anymore on a Friday night because you have to pay this mortgage."
Consider your emotional well-being, too. Are you tired of living somewhere where you have to ask permission before you paint the walls flamingo pink? Where you could be evicted next month? Or be forced to pay a higher rent? If the answer to each of these questions is "yes," envision the next time the bedroom ceiling starts to leak on a stormy April afternoon. Are you ready to make the call to the repairman yourself--and foot the bill?
Finally, when push comes to shove, are you ready to feel truly settled? Boyle says that "settled," to her, simply means she needs to stay in her apartment for three years. She's committed to a three-year contract at work, and she figures if she stays put for that long, she shouldn't lose money on closing costs--and will thereby have made a financially sound decision. Boyle's decision seems to be an emotionally sound one as well: "I actually think that I could start to have a family in this apartment and then eventually move out of the city so my kids could have a backyard." Spoken like a real-life grownup.
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