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Tuesday, September 24, 2013

Should you rent or buy?

When is it a good idea to rent a house and when should you buy?


A lot of people say that renting is throwing money away, while buying a house creates equity. This isn't true in every situation. When you start paying a mortgage, only 20-25% of your payment goes to paying off your house (principal) and the other 75-80% pays the interest (throwing money away). Each month, you pay around $2 more towards the principal, and $2 less towards the interest, depending on the size of your loan. If you have to sell a house, you have to pay the realtors and brokers 6% of the purchase price. If you sell your house for $150,000, you pay the realtors $9,000. I realized this after we bought and sold two houses in six years.

If you are planning to buy a house, you should be reasonably certain that you will be living there for at least five years. Otherwise, you may not have paid down your mortgage enough to be able to pay the realtors out of the excess. Meaning, if you owe $145,000 on the mortgage and the sale price $150,000, in order to pay the realtors $9,000, you will have to come up with $4,000. If you live in this house for three years like we did, that averages out to paying $250 a month to our realtors. If you live in this house for thirty years before you sell it, the realtor price becomes $8.34 per month. There are other factors to being able to pay the realtor, obviously, such as paying extra towards your mortgage, making improvements to your house that will raise the sale price, and the ups and downs of the housing market.

When you are renting, as long as you are out of contract, there is no cost, and no waiting period, to moving out. If you are in a contract, it won't cost you more than two months rent to get out of it.

If you move to another city for your job and you own a house that you have to sell, it might not sell for months, or even years. During that time, you'll be paying for two houses.

If you are out of college and single, it is statistically likely that you will be married soon. The average age women get married is 27 and the average for men is 29. If you are single, it is my suggestion that you rent a small apartment in order to save up as much money as you can (or pay off as much student loans and other debt as much as you can).

When you get married, if neither of you already owns a house, you can continue to rent a small apartment, socking away as much as you can towards a down payment when you do buy a house.

When you have your first child, it might be time to buy. But you need to discuss this carefully. Is this the city that you plan to live in long term? Is this the house that will meet your needs for years to come? Will it fit all ten of your future children? Is it the sort of neighborhood that you want to raise your kids in? Are you happy with the schools? Maybe you can't afford that house yet. In the mean time, you can move to a two bedroom apartment, and continue to grow your house down payment fund to astronomical proportions, while living as simply as you can.

2 comments:

  1. Why not go "for sale by owner" and not use a realtor? :P

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    1. That's a good question, and I should have addressed it. There is a reason not to sell "by owner". When selling your own house, it will take longer and sell for a lower price. One site said 25% lower, but it was hard to find any other numbers on this. But most of all, there is a lot of complicated paperwork, that is much better left to professionals. With such a large purchase, there is a lot that could go wrong, and it's not worth it.

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