Should You Buy or Rent?

by Brett & Kate McKay on March 15, 2012 · 73 comments

in Money & Career

Should we buy this house or keep renting? And what's up with my wife's fuzzy little hat?

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Homeownership has been a cornerstone of the American Dream for decades and is something many men look forward to as a sort of rite-of-passage into adulthood. But is buying a home the right choice for you? Are there instances where you’re actually better off renting?

Kate and I asked ourselves these questions last year as we made the decision to transition from renting to homeownership. Below we highlight some of pros and cons we considered when making our choice. Hopefully it will come in handy for those of you who are starting to contemplate whether or not homeownership is the right choice for you.

Pros and Cons of Renting

Why would I give up my space age apartment bachelor pad for a place in the suburbs?


Flexibility and mobility. If you’re a young, life-designing, jet-setter who loves to change locations like you change your underwear, a rental lease gives you the flexibility to easily move whenever you want. Most leases last for a year, and you can often negotiate for a shorter one if that’s something you need. All you have to do at the end of the lease is move your crap out, make sure everything looks clean, maybe replace some light bulbs, and turn in the keys to the landlord. Renting allows you to be a lot more footloose and fancy free.

More savings than buying (in the short-term). If you look at buying vs renting from a purely financial perspective, renting usually offers more savings than buying in the short term. Unlike buying a home, renting has very few upfront costs and no selling costs. It usually takes a homeowner five or more years of regular mortgage payments before homeownership starts offering any kind of savings.  So if you plan on only staying in a location for five years, you’ll probably save more money by renting.

To see the savings advantage of renting in the short-term (and buying in the long-term), take a look at The New York Times’ awesome Buy or Rent Calculator. You can change different variables depending on your unique circumstances to see when renting might be better than buying.

Reduced monthly costs. When you rent, your monthly costs are usually just your rent, utilities, and renter’s insurance. Compared to an average single-family home, utility costs in an apartment are usually significantly lower, as is the cost of renter’s insurance compared to homeowner’s insurance. If you’re lucky, you can even get your utilities costs rolled into your rent at a reduced rate. You also don’t have to pay property taxes or association dues when you rent. Well, you don’t have to pay them directly. Landlords usually roll taxes and association fees into your monthly rent, but if you live in a large apartment complex, the cost of property taxes is shared with hundreds of other tenants, thus reducing the amount your landlord has to bilk you in rent.

No money or time costs on maintenance. When you rent and something goes wrong with your place, you just have to pick up the phone and call the landlord to take care of it. If you’re renting at an apartment complex, there’s no lawn to mow, weeds to pull, or walkways to shovel. You can spend more time doing stuff that you want to do instead spending your weekends puttering around the house.

Perks. Many apartment complexes offer some nice amenities and perks that you probably wouldn’t get if you owned a home. Our old apartment had a pool that made the oppressive Oklahoma summers somewhat bearable. They also had mountain bikes we could check out and ride on the nearby trails along the Arkansas River. Oh, and they had fresh cookies in the front office every day. That was awesome.


No control over property. So you want to hang up that framed “Dogs Playing Poker” painting in your apartment? Might want to run that by your landlord first. Some don’t like tenants putting holes in the wall. You want to put a grill on your patio? Better ask the landlord first. Might be a fire hazard.  Your wife’s pregnant? Congratulations! Unfortunately your landlord doesn’t allow children on their property (keeps things pleasant for the other residents). Better start looking for a new place. When you don’t own the property, you give up some freedom to do what you want with your place.

No equity. Rent is a sunk cost. You’ll never see that money again. Again, in the short-term, that might not be a big deal (see above), but still, it’s a sunk cost.

Annual rent increase outpacing inflation. Whenever your lease runs-up, your landlord is free to increase the rent on the property. And they usually do. Before the housing bust, the increase usually matched the inflation rate.

However, in the aftermath of the U.S. housing bust, rent increases have been outpacing the inflation rate because of the significant rental demand. In 2010, rents went up by an average of 4.2% (inflation in 2010 was 3%). In some high-demand cities like Washington D.C, rent increased by 7%.  Analysts expect rental rates to rise at about 4.6% this year and continue to rise by about 4% for the next two years.

When you have a fixed-rate mortgage, your monthly payment stays the same year in and year out.

Few tax benefits. You can’t write off your rental payments like you can with mortgage interest. If you run a business out of your apartment or rental home, you might be able to get a home office deduction. That’s about it.

Listening to your neighbors chaka-chaka-ing. If you’re renting in a large apartment complex, your privacy is sort of limited. The walls at these places are often pretty thin. Hearing your neighbors yelling at each other or creating the “beast with two backs” all night long can get pretty tiring. And of course you have to be mindful of not bothering them. That means no jumping around like a crazy man while doing P90X if you live on the second floor. And if you have kiddos, constantly reminding them to not do stuff kids naturally do like skip and shriek because it will bother the neighbors can get pretty old, pretty fast.

Pros and Cons of Buying

Note to self: Train baby to mow lawn for me. He needs to start pulling his weight around here.


Emotional satisfaction. In national surveys among homeowners on why they bought a home, emotional factors are always the top reasons. Homeownership is wrapped up in so many emotional layers. For many people owning a home makes them feel secure; for others, homeownership provides a sense of independence, pride, and fulfillment.

Stability–financial and otherwise. Unlike rent, which tends to increase every year, your mortgage payment will remain the same for most of the life of your loan (assuming you have a fixed-rate mortgage).  Owning can also provide some emotional stability.  When I lived in apartments, I always felt sort of shiftless and in limbo. Now that I have a home, I’m starting to feel a bit more rooted. And I’m at a stage in life where I like that feeling.

Build equity. Unlike with rent, when you make your monthly mortgage payments, you actually have a chance of seeing your money again. That’s because with every payment, you’re building equity in your home.

More savings than renting (in the long-term). Check out The New York Times Buy or Rent Calculator, and you’ll see that as you stay in a home longer, the savings benefits far exceed that of renting.

Tax benefits (maybe).  You’ve probably heard people go on and on about how the biggest benefit of buying over renting is the tax benefits.  While it’s certainly true that the feds allow you to subtract what you pay in interest on your mortgage as well as what you pay in property taxes from your taxable income each year, there is a possibility that owning a home will provide you with little or no tax benefits.

To get the tax advantage from buying a home, the amount you pay in interest and property taxes (as well as any other deductions) needs to be more than the standard deduction (In 2011, the standard deduction for single filers is $5,800; for married filing jointly it’s $11,600). If you buy a low-cost home, there’s a good chance that what you pay in interest and property taxes won’t be more than the standard deduction.

So while there are tax benefits of owning a home, don’t assume they’ll be that great or that you’ll even get them.

More space and layout options. Most apartments run in the 1-2 bedroom range, and are laid out in a very economical way. That’s fine for when you’re single or a couple, but once you have kid, it’s amazing how a place that once seemed decently roomy now feels like a confining hole. A house (and the backyard that typically accompanies it) gives the kiddos room to roam and parents space to breathe.

Control over your property. If you want to paint the walls green or turn your garage into a barber shop, go right ahead. Feel like punching a hole in the wall? While certainly stupid, that’s your prerogative. You own the place.


High upfront costs. The high upfront costs of owning a home is one of the biggest factors keeping younger people from becoming homeowners. Already laden with mounds of student debt, many young Americans are having a hard time gathering the scratch they need to even be considered for a mortgage.

In the wake of the sub-prime mortgage crisis, lenders have gotten very strict about who they loan money to. Expect to make a 20% downpayment on your home. That means for a $135,000 home (price I’ve seen thrown around for homes in new housing developments here in Oklahoma), your downpayment would be $27,000.

But your upfront costs don’t stop at your downpayment. You’ll also have to pay closing costs. I was blown away by the number of fees we had to pay when we closed on our house: loan application fee, title insurance, appraisal fees, home inspection fees, document preparation fees, and state recording fees. Of course, you can reduce the amount you pay upfront by negotiating with the seller to cover some of the closing costs.

Not very flexible. If you’re going to buy a home, make sure you’re going to live in it for at least five years. Unlike a lease that you can get out of after a year, when you own a home, you’re responsible for taking care of it and making payments on the mortgage until you sell it to somebody else. And selling a home can be a booger. Homes can be on the market for months or even up to a year or more before they’re sold. When you’re trying to re-locate, a hard-to-sell home can quickly become an albatross around your neck.

Extra costs. Maintaining a home can be more expensive than renting an apartment. For example, our utility bills have gone up because we’re now paying for natural gas for heating and cooking and for garbage service–something we didn’t have to do when we had an apartment. Our water bill has gone up as well because we now have a yard and garden to water.

On top of that, there’s all the yard maintenance and repair costs that we weren’t responsible for when we had an apartment, which brings me to my next point…

You’re responsible for maintenance. Since becoming a homeowner, my honey-do list has gotten longer. Way longer. I’ve got a backlog of things I need to do around the house, and things get added to it every other day. Yeah, there’s a part of me that’s like, “Great! Excuses to go buy new tools and learn new DIY skills!” But there’s another part of me that’s like, “Man, what I wouldn’t give to have my weekends back.” Don’t underestimate the time and money costs of maintaining a home. They can be substantial.

Any other pros and cons for buying vs. renting? If you’ve been on both sides of the fence, what’s been your experience? Share your advice with us in the comments.

{ 73 comments… read them below or add one }

1 Justin S March 15, 2012 at 6:49 pm

I’d just like to note that, for FHA loans, the minimum downpayment is 3.5% (!), not 20%, and you can ask for that back from the seller as part of the agreement. Of course, this means higher monthly payments, but it was designed to remove some of that up-front cost barrier, and interest rates are at historical lows (TM).

2 J March 15, 2012 at 7:04 pm

I was about to comment on FHA loans, but Justin beat me to it. My mortgage is for about $250k total, and my down payment was about $10k. Although still nothing to sneeze at, it’s much more attainable than a 20% payment of $50k.

3 Trevor Smithson March 15, 2012 at 7:13 pm

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4 Michael Langford March 15, 2012 at 7:17 pm

Children can only be discriminated against in attached housing of few units where the owner lives there, or in cases of retirement communities.

(This is for US Housing Law)

5 lady brett March 15, 2012 at 7:22 pm

this is a great summary, but i would like to note that renting does not equal apartment, and buying does not equal house. you can rent houses and buy apartments (though they generally call them condos or something at that point). a couple of the points above have more to do with where you live than whether you own it.

well, that, and some of us consider “you’re responsible for maintenance” to be a pro, not a con. i had to take a new homeowners class to get an additional grant for our house, and when they said “buying a house is buying a new hobby” i was grinning, and surprised to see everyone else in the room groaning. =)

6 Marcy March 15, 2012 at 7:35 pm

Paying 3.5% down is not an advantage to the purchaser, and especially not over time as minute fluctuations can wipe out that ‘equity’ in just a month or two. It puts people into homes who really cannot afford them. Low and no down payments are a good portion of what got us into this mess.

7 Justin S March 15, 2012 at 7:53 pm

Marcy, I’d agree if you were planning to pay out the entire loan term; at that point you’d save way more by making a larger down payment and paying less in interest in the long term. Since this article seems geared towards younger people, though, FHA is definitely worth considering if you only plan to be in the house for 5-10 years before moving on (say, when you finish grad school or decide to start a family or switch employers).

8 Adam March 15, 2012 at 8:08 pm

FHA loans can be a great way to get young people into home ownership. It’s good for people who make a good, stable living but, like a lot of young people, don’t have enough cash saved up to put 20% down. With housing prices and interest rates being so low, it’s a good way for people to buy their first homes.

9 Samuel Hildreth March 15, 2012 at 9:28 pm

I was able to buy a house straight out of college with only .5% down.

10 mark March 15, 2012 at 9:30 pm

May be legal problems when getting a down payment back from a seller. ie bank fraud.

11 Dan March 15, 2012 at 10:00 pm

Your wife’s pregnant? Congratulations! Unfortunately your landlord doesn’t allow children on their property (keeps things pleasant for the other residents).

This is illegal in at least my state. Unless the property has jumped through many hoops to be designated a senior (55+) community, discriminating against families or evicting tenants who get pregnant is a big no no.

As far as renting vs buying, you’d have to be a fool to buy given the current state of the real estate and mortgage industries. The banks have brought about the return of clouded title, and the settlement they reached regarding their robo-signing practices have given them carte blanche to continue committing fraud.

12 Dave March 15, 2012 at 10:11 pm

A huge factor that a lot of people don’t consider is how dependent your career mobility depends on physical mobility. In a new world where people may change careers half-a-dozen times in a lifetime, owning becomes more of a risk. In addition, changes energy costs and the pressures of modern life makes short commute times more and more important in maintaining quality of life (QOL). Personally, living within 2 miles of my employment, shopping, etc would increase anyones QOL tremendously.

13 Suze March 15, 2012 at 10:18 pm

An apartment complex my husband and I looked at while I was pregnant (in TX) told us they didn’t allow kids in the complex. Wish I had known it was against the law to have that policy!

14 Southern Man March 15, 2012 at 11:00 pm

Sadly, it’s a different world today. My first house (purchased when my ex was pregnant with child #1) had payments of only $330 a month (that same house now rents for $900) and the profit we made selling it fifteen years later was roughly equal to the payments made – thus, we basically lived there free. Second house, same story; it was a quarter-million-dollar mini-mansion and we divorced two years later but my share of the equity was about equal to the payments made. I now have ten acres of rural land, paid for; property taxes are less than five hundred a year. With a FEMA trailer hidden behind the treeline I can live essentially rent-free for the rest of my life. My take: if you know you’re going to be in an area for a long time and are willing to put in the hours and money to fix it up and maintain it, buy a distressed property, move in, and fix it up. It’s cheaper than rent and you’ll probably do better than break even when you sell it. And even if you still want to world-hop it’s nice to have a permanent home base. Anyway, it certainly suits my lifestyle choices. YMMV.

15 DT March 15, 2012 at 11:34 pm

Where I live (south of the border), I pay $275/month rent for a two-bedroom house. Utilities (gas,water, electricity) are cumulatively about $200 annually (yeah, you read that right).
According to the buy/rent chart, I should never buy! I have no urge to buy at the moment. I’d rather put the savings into precious metals!

16 Brian March 15, 2012 at 11:59 pm

The potential downside of lack of mobility cannot be overstated. Young people should think very long and very hard before purchasing. I’m in my mid 30s and on my third owned home – but I still own the 2nd, and even with a renter I’m losing a significant amount of money a month. Without a renter, I’d probably be bankrupt in short order. “Caution” is the word of the day. Can you guarantee 5 or 6 years of stability, without any major life changes that would necessitate moving? If not, you should probably strongly consider renting instead of buying.

17 Ben March 16, 2012 at 12:05 am

“As far as renting vs buying, you’d have to be a fool to buy given the current state of the real estate and mortgage industries.”

Dan, I couldn’t disagree more. The current state of real estate is that it’s at the bottom. Now I don’t know about you but I like to buy things when they are cheap, not at all time highs. I know someone that recently purchased a home that had been on the market for over a year. The home they purchased started out at $230,000 and they purchased it for $140,000 because the previous owner just wanted to get rid of it. That’s some substantial savings. If the housing market ever comes back around there is some serious money to be made there. Like anything else, buy low and sell high.

18 Nate March 16, 2012 at 12:29 am

@Ben, I have to agree with Dan. Part of the normalcy bias is to assume things will go on like they have in the past. Because home prices have dropped people assume it’s now time for them to rise. The truth is no one has a crystal ball. My personal opinion (noting that everyone has opinions but no certainty) is that we have not hit the bottom. My reasons are twofold: First, interest rates are at all time lows, with Bernanke promising they will continue that way through 2014 as a minimum. That is their #1 tool to entice people to buy homes; lowering interest rates. They can’t go lower than the prime rate of 0.25%, without just going to zero, which won’t happen. Still, people aren’t buying. Reason #2, the more important of the two I believe, is the shadow inventory. For every house you see that is being foreclosed on or in a short sale, there are 10 more, but banks understand supply and demand and know that if they flood the market with all those homes, prices will drop out of control. So as a few get bought up they release a few more. As bad as it looks at there, it is ten times worse. That’s why there are countless people out there who aren’t paying their mortgages with banks taking 1-2 years to even get around to thinking about foreclosing on them.

19 Marcus March 16, 2012 at 2:34 am

Brett, I feel bad with my comments since you bought a house. I was hoping you moved to Vermont and planned to live there forever. But then it sounded like you are still in OK. Maybe you’ve decided to live there forever instead. I think the housing market is going to crash before it will get better. So if you want to live there for 20 years+ if won’t matter, as much, as long as you can pay for it. Mike Maloney has written about it in his book Guide To Investing in Gold and Silver. (Silver will probably increase more than gold, if your buying. Only buy bullion also. Not stocks in mines, etc.) Mr. Maloney has some stats on his Wealth Cycles blog that aren’t to nice to see but still important. Your house is not an asset. It is a liability. Unless it is giving you an income or cash flow it’s a liability. Even if you do not like Robert Kiyosaki you still should read his book Rich Dad Poor Dad. I got it from the library years ago and don’t make any money promoting him, or his gold and silver advisor, Michael Maloney. I also do not agree with how Mr. Kiyosaki bought a house from desperate people way below value and turned it into a B&B, just to increase his bottom line a little. Especially since he could have paid them more and it would not have hurt him financially.

20 Marcus March 16, 2012 at 2:38 am

I’m not all doom and gloom. There are ways to prepare for economic collaspe and not be like most people on Doomsday Preppers. Read The Modern Survival Manual: Surviving the Economic Collaspe by Fernando “FERFAL” Aguirre. Mr. Aguirre is from Buenos Aries, Argentina and lived in an econimically collasped country for about a decade. Mr. Aguirre, his wife, and their two kids finally left Argentina for Northern Ireland. They wanted to emmigrate to America, but it’s too difficult to do it legally. He thinks the U.S. dollar will go into hyperinflation because of the governments policies, which are simmilar to what Argentina did before the peso collasped. Yet he still thinks America is better than anywhere else. You don’t walk around with AR-15s like Mr. Rawles says. Though your readers who hated Creek Stewart’s article on a survival shotgun will definately hate Mr. Aguirre. Of course I could be wrong, and really really hope I am. Even though I never made it to Eagle Scout I can still learn from the Boy Scout motto: Be Prepared.

21 Marcus March 16, 2012 at 2:58 am

I forgot to mention, Mr. Aguirre says cities are better than the country in an economic collaspe. Farms get raided by heavily armed criminals. They do drive 5 hours out into the country to attack soft targets. Not huge cities though like Buenos Aries, but small cities, around 20,000, I think.

22 Nic March 16, 2012 at 6:44 am

I have found renting to be the option for me despite what others have told me about creating wealth through property. The numbers just don’t add up for my current situation.

The property I rent in Melbourne, Australia is worth about $600k, which is about the average price around here. My rent is $490 per week (yes Australia is an expensive place to live). However, a loan on the same property would be over $1000 per week. So I figure if I can do something better with the $500 per week than giving it to a bank then I am winning. In this way I have been able to build up over a year’s gross salary in savings which I have put into a high interest account.

This has been beneficial because I am 29 years old, have two kids under 2 and my wife is a stay at home mother. It has really given us financial freedom.

A small caveat though; I have been told that in Australia rents are way out of line with property prices compared to other countries – this means Australian property is overvalued (some people think by as much as 30-40%). So the numbers may be different in America. Obviously if there is a price-correction I would have to reconsider my strategy.

23 Jeff March 16, 2012 at 8:22 am

Homeownership vs. renting is one of those funny counter-intuitive economic questions. If you are truly risk-averse, you should probably not buy a house as the equity is tied to you personally, so a decline in prices will affect you negatively, however, as Brett noted, most people who buy houses do it for the sense of “security”. Kind of a catch-22, you have have to do something risky to get security? Just seems funny to me.

Anyway, when my wife and I bought our first house 2 years ago, we got 8k just for buying it throught the homebuyer tax credit, and according to the recent county sales reports, the house/neighborhood has appreciated 10-15% in that time frame (add in the 8k on the tax credit, and that amount is really 20%), which is much better return than i would’ve gotten in some other investments. We researched heavily and bought at the bottom. If you can find a deal, and you can afford it, I say go for it.

Also, get a freaking 20-year mortgage instead of 30-year. Our payments are only $180/month more (that’s one dinner a week) but we’ll pay over $100k less in interest over the life of the loan, plus I’ll own my house outright at age 45 instead of 55.

24 Rocky March 16, 2012 at 8:36 am

Thanks guys. Keep em coming. This topic and your opinions and knowledge are more than helpful. My wife and I have been considering buying for a while. Were 25you with an almost 2 yr old. Its a hard but exciting decision. Prices are so low right now and friends are all buying. But jobs are not that steady

25 Native Sone March 16, 2012 at 9:50 am

I have to agree with Marcy. The extremely low FHA down payment % is really a bit of social engineering by Congress that works on the assumption that the economy will always be going up. Which theory has been disproved many times, most recently in late ’08. What one ordinarily gets with an extremely low down payment are speculators (house flippers) and “sub-prime” borrowers who overpay in a rising market and can’t sustain p;ayments if their personal economy slows down.

26 Ross March 16, 2012 at 9:53 am

As a long-time homeowner (before divorce) and renter (after), I’ll add one more renting con: When you’re getting up in years and thinking about retiring, you’re probably paid off your mortgage and can live “free” (modulo taxes and maintenance), whereas if you’re renting, nothing changes except your income.

27 Joe March 16, 2012 at 10:18 am

Living in a mid-sized upper Midwestern city with two universities, a tech school, and a degree company, rent is rather high. When I first came here 15 years ago, rent was high around the universities and lower farther out. As more students realized this and rented farther away from the core area around the schools, rent started going up in outlying areas to match. Mind you, I’ve lived in my home for eight years, but my combined monthly payment of mortgage, insurance, and taxes for my modest house is less than it would to rent a place half the size. I agree about the mobility of renting, and it can’t be stressed enough that when you are starting out a new career, your best chances for advancement involve moving. However, if I did have to move, for the size of my house, yard, etc., I could easily rent it for more than my payments and any taxes I’d have to pay for income.

28 Karl Russo March 16, 2012 at 10:28 am

The biggest tax advantage to owning comes after your house is paid off. It continues to provide housing services for you without you having to go out and earn taxable wages to purchase them. It’s like earning tax-free the amount you would otherwise be paying in rent or principal and interest on a mortgage. This is another reason to take as short a term mortgage as you can afford.

29 Jason March 16, 2012 at 10:42 am

As my wife’s grandfather said, “home ownership doesn’t mean that you own the house…it means that the house owns you”. Great post Brett. One more thought – for those of us in CA, your reference to buying a home for $135k is hilarious – in CA, that’s more likely to be your down payment, not your cost!

30 claude March 16, 2012 at 11:12 am

I think there are very few situations where renting is a better choice than buying. By age 40, I had bought 4 houses and made money on all of them, even during those times when all the “experts” were saying real estate is a terrible investment.
Of course there are risks and yes, there are alot of expenses that many don’t take into consideration, but real estate is still one of the safest and most flexible investments and easiest to manage in my opinion.

31 Nate March 16, 2012 at 11:16 am

As for those who are saying to take a 15 year or 20 year mortgage instead because of all the savings on interest, I totally agree… kind of. I prefer the idea of a 30 year mortgage which will provide the lowest monthly payment IF you don’t have an early pay off penalty in the contract. That way you can go paying the equivalent amount extra each month (which all goes toward the principle), but the low monthly payment is there just in case you stumble on a rough month. Gotta have a bit more discipline though to make sure you do pay extra each month.

32 Amy Mullen, Realtor CPA CDPE MBA March 16, 2012 at 11:36 am

I have to say…I love your blog! Great pictures and so well written!

But…the upfront costs to purchasing a home are not that high. In many areas, USDA still offers 0% down on rural houses and FHA offers 3.5% down. You don’t need “perfect” credit but you will be reviewed in the wake of the housing crisis.

At the end of the day, home ownership is still a solid investment into the future – in the long run. What matters most is the individual – it’s not always the right time in someone’s life to buy.

Have a great day and keep blogging!!!


33 Kevin March 16, 2012 at 12:24 pm

If you don’t have 20% down, don’t buy. Private mortgage insurance or PMI can significantly add to the monthly payment. Either continue to rent or find a cheaper house. You can get a lot of the same benefits with a $70K home as a $170K home.

34 Steven Horvat March 16, 2012 at 12:39 pm

I would love to have a home and in 2013 when we are eligible for credit reasons (and employment reasons) I might be one of the lucky people to have a house of their own for the first time. My wife is a veteran and from my understanding its zero down. The only expense that we have to pay for is the housing inspection which can cost up to $3000 or more every time they come out. So for now I’m saving our money in a cheap apartment and hoping that the housing goes down more so we can get a great deal!

35 Thomas March 16, 2012 at 12:49 pm

I have to agree with Jason. CA home prices are still at record highs in the prime areas. My wife and son live in the Santa Clara Valley (SF Bay Area). Salvageable fixer-uppers in this neck of the woods start in the low $400s. Not cheap by any means. But this is where the jobs are and we are not interested in having me commute for several hours each day in order to live in a cheaper area (e.g. the central valley or points way North or South). Time is too valuable and way too scarce for us. We presently rent a very small house just down the street from my job and in close proximity to our church and several stores. We’ve been blessed with an amazing landlady who keeps our rent low. She owns the property outright, so her overhead costs are lower. Plus, she says she’s not interested in raising our rent as long as we are good tenants. Our plan is to stay in our current place until the fall of 2013, take advantage of our rock-bottom rent and save up as much as we can for a down payment, and then see where prices are in 2013 and whether or not we can afford to buy. There is a lot of data out there right now that suggests another large decline in housing over the next couple years. According to CoreLogic, which tracks mortgage performance data, homes at or near being underwater are 21.5% in our area, which is approximately 150,000 homes. When interest rates start climbing (and they will at some point) and as banks continue to offload foreclosed properties, housing prices will likely fall, pushing the underwater percentages even higher.

A note on FHA: We looked into this option recently and were not all that excited about the required FHA mortgage insurance (MI). Based on the information we received, the FHA assesses an upfront MI fee of 1% (rolled into your loan amount, which means you are paying interest on it) and then you are required to pay MI fees at 1% a year (monthly installments added to your mortgage payment) for an extended period of time (even if your loan-to-value ratio breaks below the 80% mark). So if we were to take out a $400,000 loan, that would be $4,000 rolled into the loan, plus $2,700 worth of interest over the life of the loan (assuming 30 years), plus 1% of the loan balance annually until LTV is below (I think they said) 78%. Assuming prices stay constant over the life of the loan (and they will likely fall in the short run), it would take roughly nine years to reach 78%, which would mean you’d have to pay roughly $35,000 in MI fees. Add this to the upfront costs and the added interest, you’re looking at $41,700+ in MI. The cost of debt grows even more if you factor in the extra interest you are paying on the larger loan (verses putting down more money up front). All in all, FHA is an option, and for some it is the only option, but if you are able to wait a bit and go conventional, you’d probably be much better off.

Regards to you all,

36 JB March 16, 2012 at 1:00 pm

It’s all the numbers. Many of the “pros” of renting and “cons” of buying don’t hold true in specific circumstances.

For example, I purchased my $75,000 condo with 10% down – I got a very good deal from a short sale, and, aside from the initial down payment, I have much LOWER monthly costs than if I’d rented the equivalent property in this area. My cash flow is better, I have a small property investment, and my mobility is still very good since I can probably easily sell the place for what I paid for it or a little more, since I DID buy at the bottom of the market.

37 Lindsay March 16, 2012 at 1:22 pm

“you have have to do something risky to get security? Just seems funny to me.”

It’s not risky if you buy a house you can afford, you plan to live there for years, and you get a fixed rate mortgage. Currently, the price of renting a 3 bedroom house like mine, in my neighborhood would be about $1000, while my monthly payment on mortgage, interest, tax & insurance is $900.

The insecurity of renting is due to the lack of rights that renters have in the US. In nations where renters’ rights are similar to those of a homeowner, you have more lifelong renters.

38 Glenda March 16, 2012 at 1:57 pm

What about the new tax something about a % fee when you sell your home? It is effective when selling homes in 2013.

39 Glenda March 16, 2012 at 2:01 pm

What about the new tax something about a % fee when you sell your home? It is effective when selling homes next year.

40 Ian March 16, 2012 at 3:21 pm

Haha Amy, at least you’re honest about what you do!

The Wall Street Journal’s book on home ownership says the average return on a home in America, in the last 60 years, is -1%. Most people lose.

My wife and I are researching buying a house, and to be honest I’m afraid I’ll have to tell her we can’t yet – not until the other debts are paid down. She wants it before we have children, and while that probably shouldn’t wait, the house just might have to.

41 Jeff March 16, 2012 at 3:50 pm

It may be shocking, but here in Pittsburgh we have had a stable housing market. Even when the economy, prices remained leve.

We are hoping to make about 40K when we sell next year.

My father always used to tell me “The only time it is OK to buy a little bit more than you can afford is on a home.”

42 Evan March 16, 2012 at 5:47 pm

Regarding potential tax benefits: the mortgage interest and property taxes don’t have to add up to the standard deduction alone. If you make charitable contributions (to your church or other non-profit organizations), these would also count towards your “itemized” deductions.

I think it is also important not to think of buying a home as first-and-foremost a financial investment. It is also a social investment: a place where you build a life with your family and friends, not merely an instrument to get ahead.

43 James Petzke March 16, 2012 at 6:11 pm

I’m a big believer in owning your primary residence, as long as you can afford it. One of the big problems that caused the housing bubble was that people bought homes they couldn’t afford, and then didn’t pay the mortgage payments.

44 Stephen March 17, 2012 at 12:10 am

There’s several ways to look at home ownership, and it varies according to region (and country as we have a lot of international readers here).

I’m paying $625/month for a 1 bedroom apartment plus electric. I just bought a house where my mortgage, taxes, and insurance will come to about $650 for a 3 bedroom house. I’ll be paying a little more for utilities and maintenance, but overall the cost difference shouldn’t be that much until the house needs a new roof! Having a roommate (or two) also helps substantially.

If I decide to sell my house and lose money on it, I’ll still receive something in return versus renting. As I’m 21, I’d much rather buy than rent.

45 Kory March 17, 2012 at 5:47 am

I find the timing of this article humorous. I just put earnest money down on a new to me house. The market where we are buying is a complete sellers market right now, one of only a few in the country I know. It is ridiculous, the seller won’t pay a dime towards closing or offer any concessions and there’s not much I can do about it. Fortunately I was able to get it w/o a bidding war. The rates are so low right now that I couldn’t pass up the deal.

46 Carter March 17, 2012 at 12:30 pm

I live in Saskatchewan, Canada, so the housing market and mortgages are a little different here. From my experience we felt very little of the recession, and in saskatoon, where I live, the average price of a house actually doubled. This is unfortunate for a young guy like me considering buying in the next few years, but we also have a 5% down payment here because the government is trying to encourage people to stay and live here.

I understand the shift in culture from buying to renting to a degree, but I just can’t get away from the fact that every rent payment is going down the drain. It was one of the smallest points in this article but to me that’s huge. If you have a need, you can always sell your house. It seems to me like most arguments against buying are thinking extremely short term, something that seems to be our number one priority these days, and shouldn’t be.

47 Eric_G March 17, 2012 at 2:04 pm

One other factor: your age. If you’re over 40 (as I am), a 30 year mortgage may not make sense. It becomes difficult to find something reasonable when you’re looking at a 15 year mortgage, unless you’re looking at making a 50% or more down payment. I’m assuming a retirement age of 65, with about 1/2 your monthly income.

48 Chris March 17, 2012 at 9:09 pm

Saw several comments on this but not a lot of clarification. The reason you want to put 20% down is to avoid having to get mortgage insurance (MI, PMI, etc.). This is not insurance that will help you make your payments if you lose your job or some other catastrophe happens. This is insurance that you pay for to protect the bank.

49 Joe March 17, 2012 at 10:18 pm

I know where I am, western NY, owning is cheaper than renting. So I get way more space, for essentially the same price.

I have to go against the grain here, I have an FHA mortgage and I only put 3% down. I have a stable job, but I wasn’t in it long enough to build up the 20% needed for a conventional loan. I don’t see any problem in that, all these low down payment loans do is eliminate saving for a down payment. In fact, the money I didn’t spend of the down payment I saved for any interruption in my employment. I can pay my mortgage for almost a year on savings alone. I think that makes me more stable than someone who dumps a large sum of money on a down payment.

I also don’t agree with going for a 15 year or 20 year mortgage. Get a 30 year with no early pay off penalty. Being the man that I am, I have discipline, as should you. I pay extra every month, even though I’m not “forced” to. I also put extra down when I get bonus checks or my tax refund. If I keep up on this, I’ll have a 15-10 year mortgage. However, I’ll be able to drop to the regular payments if I were to have a financial issue such as losing my job.

So I have to greatly disagree with others here. The two things that many don’t like, is what let me by a house and still keep a good financial cushion.

50 Adam Groblewski March 18, 2012 at 7:34 am

Before the housing bubble, challenging the idea that there are situations when renting would be better than buying was heresy, but the pros and cons you laid out here are a great unbiased perspective. In summary, I would say don’t buy unless you plan to live in the home for at least 5 years. As a mortgage broker I should mention that while a 20% down payment will eliminate the need for mortgage insurance, it’s not required. With conventional financing, you can put as little as 5% down, or 3.5% for FHA financing. As mentioned above, FHA mortgage insurance is very expensive (and it’s going to increase in April) but if you have a decent credit history, conventional mortgage insurance is quite affordable.

Also, here in Greenville, South Carolina there are two programs sponsored by the state and county government that offer first time home-buyers assistance with the down payment, one offers $3,000 and the other $4,000. Some borrowers have to re-pay the assistance back at a low interest rate, while some borrowers who make under certain income limits don’t have to repay anything if they live in the home for more than 5 years, making it essentially free money. I’m sure there are similar programs in other areas of the nation, which brings up another debate, if homeownership is so great in it of itself, why should the government subsidize it by giving away taxpayer money to people who don’t have a down payment?

Keep up the good work with the AOM!

51 Doug March 18, 2012 at 7:39 pm

A lot of the negative comments regarding buying a home say it’s not worth investing in a home.

Stop treating it as a get rich quick scheme! Buy a house to live in, not to “flip.” Treating houses as such didn’t and doesn’t help the economy (if people weren’t treating homes this way, the banks wouldn’t have been able to do what they did).

Buying a home should be treated as fulfilling one of the requirements of Maslow’s Hierarchy (and really could benefit each point in a way) not a way to increase your bank account.

52 Jordan Smith March 19, 2012 at 2:25 pm

On the part where you have control over your property I have a question: what about home owner associations? I’ve heard some horror stories of piles of regulations and restrictions so I guess I’m not sure how much control you would really have.

53 Nick March 19, 2012 at 4:09 pm

People buy house payments, not houses. Vast majority of people buy a house based on a monthly payment they can afford. If interest rates increase (only way for them to go at this point, Fed can’t go much lower than zero, what direction is the 10yr Treasury rate headed lately) buyers can afford less, putting downward pressure on the price of a house. For every 1% of interest rate increase a buyer loses about 10% of their purchasing power.

To those who think this is the bottom, Are you confident the Fed can keep rates low forever? Oh and what happens when Baby boomers need to sell homes en masse to access (what’s left of their) equity to be able to retire?

Asking a realtor if it is a good time to buy a house, is like asking a car salesman if it’s a good time to buy a car.

54 John H. Moon III March 20, 2012 at 11:25 pm

The best of both worlds can sometimes be renting a house. Usually you can find houses for rent from private landlords rather than large apartment management companies. This means that you can negotiate the terms of your lease such as painting the walls or installing upgrades to the house for $$$ off the rent. Additionally, locking in a long term lease can often offer more flexibility than buying a home but keep the cost from rising arbitrarily. For me personally, I would rather rent a home while saving up for a significant down payment on purchasing a home than putting down a minimal downpayment and worrying about how to make ends meet when something (i.e. life) happens to me or my family. Just my two cents. Great post and a great blog by the way.

55 k2000k March 21, 2012 at 1:34 am

As someone working in commercial RE I have to take umbrage with individuals who think owning a home is a good investment. If your planning to extract a good amount money after your sell your house there is one thing you need to know. Long term appreciation rates on housing trend with inflation, it about a .2 to .4% real return after accounting for inflation. Short term, and short term can be as long as a decade or more but that is speculation, houses can appreciate at a rate greater than this; however, in the long run housing, outside of a few very desirable areas, will return to this mean. It is simply unsustainable for an asset, that generates no income for the vast majority of owners and is in fact more of a liability when factoring in home care and taxes, to appreciate at a rate greater than this.

to summarize:
A house makes a great home. It is a terrible investment. There is a reason that home building developers buy large swaths of land then subdivide it to build houses, it wouldn’t be very profitable otherwise.

56 David March 21, 2012 at 7:05 pm

“our wife’s pregnant? Congratulations! Unfortunately your landlord doesn’t allow children on their property”

Wish my landlord did that.

57 JH March 22, 2012 at 8:58 am

“Unfortunately your landlord doesn’t allow children on their property (keeps things pleasant for the other residents).”

Just wanted to note that this is illegal (per the Fair Housing Act).

58 Cris March 22, 2012 at 7:51 pm

I think that buying a home is an excellent investment if you have the means and ability to improve it. In our first year of marriage, my wife and I purchased a farm that was somewhat rundown and very very out of date, (all two-prong outlets, thirty year old stove, so on). Got a good price on it, put about $15k into it, did all the work myself, and two years later, sold it for a net gain of $20k

59 Chef Nusy March 23, 2012 at 11:26 pm

I have to disagree with Claude about the CA house prices – it depends where you are in California. Sure, in the Bay Area or around LA, 135k will barely give you a down payment for a decent-sized house… In the Central Valley, you can get a decent 3/2, even 4/3 with it… A little while ago, when our finances seemed stable, me and my husband were looking into buying a house. We pay a relatively outrageous amount for rent, especially compared to mortgage rates (FHA in particular, but even regular). We found we could save a good 100-200 bucks a month with owning AND have more space, more privacy, and all that.
About the pregnant and evicted: our complex explicitly stated that if I were to get pregnant, we could choose from mandatorily upgrading to a 2 bed/2 bath apartment, or getting the heck out. So much about protection.

60 Man Wall March 26, 2012 at 1:42 pm

I live in New York and if you can afford to pay rent here then you can afford to pay a mortgage. It comes down to a simple math problem, do I want to spend $1,200+ every month for the next 30 years ($432,000 total) or buy a condo or co-op or even a house and never have to deal with apartment hunting again.

61 Jeffrey March 27, 2012 at 12:02 am

I’m currently looking at purchasing a house and am able to get a conventional loan with only 5% down. I live in Iowa and most houses I’m seeing will pay ALL closing costs. Like the law of real estate (location, location, location) it all depends on where you’re looking too.

I’m with some others on here…I’m bored sitting around my apartment with no garage to tool around in or a patio to grill some animal parts. If I can have my own place to do what I want for what I’m paying now or less…I’ll take it!

62 sam March 27, 2012 at 11:03 pm

Single/newlywed = renter, married/kids = homeowner

63 sam March 27, 2012 at 11:04 pm

Single/newlywed equals renter, married/kids equals homeowner

64 sam March 27, 2012 at 11:05 pm

Single or newlywed equals renter, married with kids equals homeowner

65 Grant March 28, 2012 at 11:05 pm

A 20 year mortgage will definitely save you money vs a 30 year mortgage, However, you can get the same savings as the shorter term note if you pre-pay every month. Just pay your 30 year note like it was a 20 year note. Same savings but with the 30 yr mortgage you can drop back to the lower payment if you loose your job or have other financial difficulties. The only real advantage of the 20 yr note is that it forces you to make that bigger payment, that you might not otherwise do if you did not have to.

66 Lucy October 6, 2012 at 7:02 am

I am 59 and would like to know is it worth buying or renting?

67 "How to get" Matt October 24, 2012 at 5:57 am

i always found that renting over a long time is financial murder.

68 Tina January 14, 2013 at 12:00 am

I heard someone say once “since there’s no such thing as a 30-year job anymore, I will never take out a 30-year mortgage.” We got stung by the scam mortgages before the bubble burst. After the kids are both in school and I can work full time again, we will live on one income, save the other. Ten years, buy something outright. I will never ever pay a bank that money again. Ever.

69 Chris S January 20, 2013 at 2:59 pm

Just sold my house and have some thoughts on this topic.

1. “Owned” the property for a little over 5 years. I put “owned” in quotations because I didn’t actually “own” anything, the bank did. They should call it “homebuyer”. You don’t own squat until you have the title.

2. We were very lucky and got full asking with a short time on the market. Most people aren’t so lucky, liquidity is a BIG deal.

3. Remember interest is front-loaded. Banks aren’t stupid, they know most folks don’t stay in their houses as long as they THINK they will. Unless you stay in the house for a VERY long time, buying may not be the best course of action.

4. Mortgage interest deduction – I love deductions, but spending a $1 to save .25 is not good math IMO.

5. In many states the seller pays closing costs. Between that and realtor commissions be prepared to shell out at least 10% of the value of your home.

6. POTENTIAL asset, certainly not an investment. A personal residence is a money suck. It is an investment as much as a car is an investment (it’s not).

7. Maintenance. Mowing and shoveling are the most overrated “homeowner” experiences ever. Not to mention everything else that goes wrong comes out of your pocket.

8. Keeping it up-to-date. This is an understated biggie. Hardwood floors may not be in style in ten years. Remember those fabulous oak cabinets from the 80s? All that stuff needs to be changed/updated or the sale price of your home will suffer.. Cha-ching, more money out the door.

I just feel the homeownership fantasy is highly overrated, fraught with under appreciated risks, and certainly not the best means to grow wealth.

That being said, you have to live somewhere.. :)

70 Josh Macy April 16, 2013 at 1:26 pm

It should be noted that national happiness indicators show that people with less space closer to work are happier than their opposites. Commuting should be an essential part of the rent/buy question.

71 Mike April 20, 2013 at 1:43 am

It’s illegal to discriminate against tenants on the basis of their having children. There are very limited circumstances in which this is allowed, but they basically extend to situations in which your landlord is sharing the space with you as a roommate.

72 Joe April 20, 2013 at 9:59 am

Seriously, you even have to ask. BUY, if you are still renting over 40, sorry but something has gone seriously wrong, if you are divorced and had to give your ex the house for the kids, then that’s fair enough and totally understandable but there is no other excuse not be on the property ladder past 40. I can never understand people who don’t aspire to owing their own property, apologies if that offends but it’s just my personal view

73 Korey April 30, 2013 at 9:05 am

I have owned my home since 2003. As a single mother without any support. I had to put over 30k into my “fixer upper” due to hurricanes that destroyed my roof, windows, electric, and flooring. My house went into foreclosure the first time when the market went belly up along with my job. I did save my house and get a job however, It is back in foreclosure again as I just cannot get caught up and catch a break. My house has been underwater for over 4 years now. Everything is breaking down and I cannot afford to fix anything. I am DONE with home ownership and the banks that won’t help someone who really wants to stay. I will rent a home or rent an apartment so someone else will have the headaches of maintaining the lawn and fixing crap that breaks. I just have to sit back, watch the grass grow and pay my rent and pocket the rest. Owning a home unless your wealthy (making over a 100k a year) is not worth it unless you pay the whole thing in cash (which again, only the wealthy can do).

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