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5 Magic Points: Should I BUY or RENT my HOME?
Buying a Home is the American Dream. It is more than a place you put your hat at the end of the day. It defines you, protects you, and prospers with you. Yes, Home Ownership is a noble pursuit, but it always starts with this first, important question: Should I buy or Rent my Home? The answer, surprisingly, is not so obvious.

Now the question of “affordability” is an important one, but that’s not the subject of this article. We have a free calculator at our website. You’re welcome to use it. The subject of this article, however, deals with the questions that must be answered, before a renter can migrate into the magical realms of HOME OWNERSHIP.

Here are 5 MAGIC POINTS that you need to examine, on whether or not to BUY or RENT your next Home:

EXPENSES
COMMITMENT
MONTHLY PAYMENTS
TAX RETURNS
WEALTH


1. EXPENSES:

Renting a home requires that you give a check to the landlord each month. That’s it. You’re done. Everything else is simply taken care of for you. When you OWN a home, you are in business for yourself, and this means that you must handle all of the expenses yourself.

You are responsible, of course, for the monthly mortgage payment to the bank...
You must pay all your utilities, including phone, gas, electric, cable, trash, water, etc.
Don’t forget your responsibility to take care of maintenance. Not having enough money in the bank account is not a good enough excuse. If it’s broken, ya gotta fix it!
Don’t forget your Homeowners Association Dues, your Membership Fees, Property Taxes, Special Assessment taxes, insurance…yada, yada, yada.


When you rent a home, you give the landlord a check. When you buy a home, you must ensure that all expenses are met and managed every single month, forever...

2. COMMITMENT:

Renting and Buying have different financial commitments.

To rent a home usually requires a lease. Sometimes it’s month to month; sometimes it’s a 12 month lease. But, no matter what, there’s always a way out. Your commitment is limited to the time you choose to stay and reside there.
When you buy a home, you usually sign a 30 year mortgage, which most people would argue, is like forever. You are committed to ensuring that the payment is delivered to the bank or lender every single month, on time. They don’t care if you want to move at some point. You can sell your home of course, but you can’t just break your mortgage, like you can break your lease.


Buying a home requires a long-term, financial commitment. Renting a Home simply requires that you cut a check each month you reside at the home of choice.

3. MONTHLY PAYMENTS:

It always appears that a renter will pay less each month on monthly payments. Let me shed some light on this subject. Examined closely, this is as far from the truth as the moon to the Earth. Let’s use an example:

As a renter, you pay $800 a month, let’s say, that increases 5% each year. The math may differ with you and your landlord, but you get the idea. Barring rent-control, this is inevitable. Simple enough.
As a Homeowner on a fixed rate loan at $1000 Principal and Interest per month, the payment never changes…Never…Not ever…
In other words, the renter’s monthly rent will eventually SURPASS the homeowner’s mortgage payment…Much faster then you might expect.


In this example, our Renter’s Monthly Payments will exceed our Homeowners Mortgage Payment, in about 6 years.

4. TAX RETURNS:

A renter usually does receive a tax benefit from the State and Federal tax boards each year, sometimes referred to as a “renter’s credit”. But the Homeowner receives a deduction on the Interest paid on their loan. This is a huge benefit to the homeowner.

Let’s use the same example with our $800 renter. At the end of the year, our renter might receive a $600 renter’s credit on their 1040EZ form when doing their taxes. Simple enough.
Our Homeowner, on the other hand, paid a total of $12,000 in mortgage payments, of which about $11,500 went towards INTEREST. This INTEREST is a write-off.
Let’s see…$600 versus $11,500. Hmmm. I like that math. That equates to a nice healthy tax return for most of us, come April of next year.


Take those thousands of dollars in tax return, and go on a nice Cruise around Jamaica!

5. WEALTH:

It’s arguably much, much harder for a renter to build wealth. There is no built-in mechanism for appreciation, whereas the homeowner has postured themselves wisely for the future.

Let’s say we have a renter that wants to get wealthy. Great! They must go find a business to run, or a stock to invest in, or come up with a great invention, or be the next rock star, or follow a family friends “tip”, and go do Cattle Futures from August to September (just an example, folks…I don’t know anything about cattle…). In any event, most people would be concerned that our renter is following the proverbial “pipe dream” towards wealth.
But let’s say we have a homeowner who wants to build wealth. Great! What do they need to do? Simple….Nothing…Pay the mortgage…Live in the house…Go work your job. That’s it. Real Estate appreciates in value, on average, over the long haul, like no other financial vehicle. It is a virtual certainty, and it is automatic. The homeowner controls the total value of the home. That’s the magic of leverage.
Let me drive the point home: Someone might buy a house at $150,000, let’s say, and over the course of 7 to 10 years, it is completely reasonable to suggest that this very same house could be worth around $600,000.


Renters do not have a built in advantage for building wealth, whereas Real Estate appreciates in value as a virtual certainty. They don’t call home-ownership the “American Dream” for nothing!

SUMMARY:

The subject of deciding on whether to Buy or Rent, is not simple. In the end, it boils down to a question of complexity. Being a Renter is simple. Being a Homeowner is more complex, and yet, that does not mean that it is not within your grasp. It IS!!! There are so many people that are just waiting in the wings, yearning to help you get there. Real Estate Agents, Mortgage Brokers, Friends, Family, etc.

With all of these resources around you, just about anyone can own a home, and in this great country, the American Dream of Home Ownership is completely within all of our grasps!

But do me a favor. Give yourself the time to examine these important questions first. Look within. As we all get older in life, we yearn for more. Buying versus Renting is a common theme in this journey. As we wave goodbye to the younger years, we say so long to the simplicity of life, and we say hello to the promise of prosperity, wealth, and a better tomorrow. We also say hello to higher, more complex things. Often times, it’s simply the willingness to accept complexity that will get you to the understanding you need.

Best of luck on your journey, from Renting to Owning your next Home!

We’ve enjoyed providing this information to you, and we wish you the best of luck in your pursuits. Remember to always seek out good advice from those you trust, and never turn your back on your own common sense.

About The Author


Tom Levine provides a solid, common sense approach to solving problems and answering questions relating to consumer loan products. His website seeks to provide free online resources for the consumer, including rate-watch, tips and articles, financial communication, news, and links to products and services.

Copyright 2004, by LoanResources.Net  

 
Your Money: Review Universal Life insurance policies as retirement approache
By Michael Baron, Great Plains Diversified Services Inc., Bismarck, N.D.

Dear Michael: We had purchased a Universal Variable Life back in the 1990s to provide funds to our non-farming children. However, over the past four years, we've noticed the value on these contracts keeps dropping off quite a bit and we're a little worried about the future. What should we be doing? - Variably Confused.

Dear Variably: A great many life insurance contracts were sold in the 1990s that looked fantastic considering the stock returns of the decade. It was almost impossible to not make money during this decade. However, since 2001, the market is down about 18 percent using the S&P 500 as a marker

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Life Insurance Benefit Lets Consumers Invest for Long Term; Portability and Options Provide Affordable, Simple,
Study after study shows most Americans are not financially secure. Employers can help their employees manage their finances better and provide them with permanent life insurance by offering group universal life insurance as an employee benefit.

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Ask the Division of Insurance
"Ask the Division" is designed to provide answers to your insurance questions. All questions are answered by the South Dakota Division of Insurance.

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Mortgage Prepayment Penalties - Just Say No
One of the most common terms found in a new home loan is a prepayment penalty. This type of penalty says that if the borrower pays off the loan early, commonly during the first five years of the loan, then the borrower will be responsible for paying an additional amount of money, typically about six months interest on 80% of the mortgage balance. Sub-prime market loans will typically carry prepayment penalties more than standard mortgage loans.

You may plan on keeping the house for the entire duration of the prepayment penalty, and be tempted not to worry about it much. But sometimes life circumstances change, so it's wise to avoid any type of prepayment penalty if you can. A typical prepayment penalty might equal five months worth of monthly loan payments, so it's worth checking on. Of course, you should always ask (before you sign) if a new loan has a prepayment penalty. In fact, ask the lending officer to point out to you in the document where a prepayment penalty is discussed.

Most items in a loan are subject to negotiation. If you haven't signed loan papers yet, and you find that your loan has a prepayment penalty, you might offer to pay an additional closing point or so to see if it can be removed. The key at this stage is that if you agree to the prepayment penalty, you should try to find ways to reduce either the amount, the term, or both as much as possible.

If you already have a loan, you are bound by the terms of the document, unless you can negotiate them. There are perfectly legitimate reasons why you may want to pay off a note early - most often, due either to refinancing or selling the house. You may be able to contact your lender to see if they will waive the prepayment penalty if they are able to provide refinancing. If interest rates have dropped a lot, and you can't get out of the prepayment penalty, it may be worth rolling that amount into a new loan. And of course, try to get the new loan without a prepayment penalty.

About The Author

Jakob Jelling is the founder of http://www.cashbazar.com. Visit his website for the latest on personal finance, debt elimination, budgeting, credit cards and real estate.  

 
Take your time when picking mortgage
AKRON, Ohio - When real estate appraiser David Ott refinanced his home this summer, he opted for an adjustable rate, interest-only 30-year mortgage.

The Wadsworth, Ohio, resident, 42, got a mortgage product that barely existed a few years ago.

Akron, Ohio, elementary teacher Doreen Slinger recently signed final paperwork to buy a home. She used a split or piggyback loan, which allowed her to avoid paying private mortgage insurance, even though she did not have the traditional 20 percent down payment.

Just as in Ott's case, the mortgage product Slinger got is relatively new.

A generation ago, the 20-year mortgage was the only game in town. Now there are dozens of ways to borrow, and homeownership is at an all-time high.

For borrowers, though, it is no longer a simple matter of comparing interest rates.

It is a complicated smorgasbord.

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The Best Ways to Pick a Mortgage
Source: Charleston Gazette, The
Publication date: 2004-11-05


Types of mortgages

* ARMs, or adjustable rate mortgages, come in a variety of permutations. Some adjust annually, and others adjust every three or five years.

* Fixed-rate mortgages have an interest rate that is locked in for the length of the mortgage and never changes.

* Hybrid loans carry a fixed interest rate for several years and then adjust.

* Two-step balloon loans are for consumers who know they are going to be relocated in a specific period of time. The mortgages carry a low interest rate for three, five, seven or 10 years and then the full balance is due.

* Interest-only loans that before the Great Depression were the standard form of home mortgages made a comeback about three years ago, and now are available in many versions.

Down payment options:

Homebuyers can choose from loans with 0 percent down, gift programs that provide a down payment and variations on the traditional 20 percent down. Homebuyers can pick from 15-, 20- and 30-year loans.

Some local lenders even offer a 40-year mortgage, although it is rarely used.

Fixed-rate, 40-year mortgages are being tested elsewhere in the country by a partnership between 16 credit unions and mortgage giant Fannie Mae, which next year will decide whether to roll out the loans on a broad scale.

There also are the federal and state programs for first-time homebuyers, veterans and low-income buyers.

For anyone who does not qualify because of poor credit, there is also the subprime or nonprime mortgage with higher interest rates.

Here are the advantages and disadvantages of some home mortgages:

* 15-year fixed:

Advantages: Shorter term. Home owned in half the time of conventional loan. Total interest can be lower than a 30-year fixed mortgage.

Disadvantages: Bigger monthly payment. Qualifying is tougher because of higher income requirement.

* Adjustable-rate mortgages:

Advantages: Initial lower payments. Initial rate usually 2 percent to 3 percent lower than conventional loan. Makes buying more affordable. Payment drops if interest rates drop.

Disadvantages: Payments go up if rates go up. Requires budget discipline to anticipate interest rate movements.

* Hybrid loans:

Advantages: All the advantages of an adjustable rate. Lower rate can be fixed for a varying number of years, say one, three, five or seven. Usually the shorter the fixed time, the lower the rate. Eventually converts to a fixed rate. If housing prices rise, you can sell and trade up before the conversion kicks in.

Disadvantages: If you do not convert, it is just a regular ARM. You might want to avoid this if you plan to own the home for a long time and anticipate interest rates rising.

* Interest only:

Advantages: Can get a bigger loan and more house. Typically used by home buyers who receive the bulk of their income in bonuses. Good if you expect quick increase in income to pay down principal. Good if you plan to move before principal is due.

Disadvantages: Need budgeting skills. Need cash for lump sum payments. Must refinance at end of interest payment period. Does not build equity unless the home appreciates.

* Low down, no document loan:

Advantages: Helps if you have trouble verifying income. Lender does not require proof of income and assets. No debt-to-income ratio used.

Disadvantages: Higher interest rate because of higher risk. Bigger down payment. Higher credit standards.

* Two-step balloon loan:

Advantages: Good choice if you do not expect to own home past date when the balloon payment is due. Payments are usually lower than conventional fixed loans. Lower interest rate than long-term loan.

Disadvantages: At the end of a few years, you must sell or refinance because all remaining principal is due. Rates may be higher. May end up owing remaining principal plus additional settlement costs if the house does not appreciate.

* Piggyback or split loans:

Advantages: Can avoid paying private mortgage insurance (PMI) when the down payment or equity in your home is less than 20 percent of the value. Mortgage payment generally is lower. May be used with most fixed rate and adjustable rate loans.

Disadvantages: Higher interest rate on second mortgage. Slightly higher cost since there are two loan closings.

Sources:

Mortgage Bankers Association

www.mbaa.org/

Goodmortgage at

www.goodmortgage.com.