For nearly two months, Alex went back and forth. Should he just rent another two bed-room apartment or should he buy? Whenever he added up the numbers, buying would be “pushing it.” After paying a mortgage and other bills, he would have nothing left over to save, but wasn’t a house an investment in itself. Besides, he was tired of landlords. He wanted a place “to put down roots.”
Elena had the same decision to make. They were converting her apartments into condos and offering her a chance to buy one of the renovated units, equal to what she was now paying in rent.
Should she take the leap?
Yes, buying a home comes with many considerations and endless doubts. For some people it makes the most sense, but others renting is better.
To determine which is right for you, you first need to determine whether you can afford to buy. Sometimes homeowners stretch all their finances to get that dream home because it’s “an investment, something to hold onto for those retirement years.”
Is your house a good investment?
Several experts caution against thinking of a house as a retirement saving plan or even an investment.
David Cook with The Wall Street Journal describes buying a house with a long-term mortgage as another form of renting.
“It just goes down the same black hole that sucks up any other renter’s money,” he advised in a recent article. “And it takes 20 years before a typical borrower pays more principal each month than interest.”
He said the best way to make a true profit on a home is to pay as little as possible by buying cheaper, quicker and smarter.
Some experts argue that relying on a house as a retirement asset can be riskier than buying and selling stocks, with the stocks offering a greater return. Especially, since the real estate market cycles like the stock market.
On the other side are people that argue that buying a home as oppose to renting can mean significant tax savings and even reduction in monthly payments depending on the interest rate and home loan specifications.
Some home owners talk about “cashing in” on their purchase by selling a home that they bought, say for $62,000, for nearly double its price a few years later. They also talk about gaining thousands of dollars in equity even without selling the house.
Lifestyle and cost
Before making any decisions, look at all the factors; look at how long you plan to live in the house and the home’s prospects for appreciation and taxes. The New York Times has a graphical calculator that can help you with your decision – New York Times Calculator. Play around with it.
It comes down to this: with a double digit appreciation rate covering commissions, property taxes and insurance, then the decision to buy over renting makes more sense.
But a slower appreciation rate complicates the decision. Compare a $1,000 a month rent to a $200,000 house that appreciates only three percent per year. With a 6.5 percent mortgage rate, a down-payment of about $15,500 and three percent in property taxes – the estimated break even period compared to rent is 16 years.
After reviewing all his options, Alex returned to renting. He didn’t like the idea of clearing out his savings account and then being tapped to the point of not being able to build it back up again.
“It could cost too much for a very long time,” Alex said.
Elena on the other hand bought the renovated condo.
“With a decent enough down payment, my rent and mortgage numbers came out even,” she said. “It was worth it just to have some where to live long term and call home.”