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Owning a Home Vs. Renting a HomeThe desire to own your own home has always be a key principal of American culture. Many people believe, that owning a home represents financial stability, psychological and emotional pride in ownership, and a sense of belonging to the community. However, before purchasing a home, the home buyer should consider both the advantages and disadvantages of home ownership.
Most economists believe that at the maximum, the portion of the population that owns their own home will probably never exceed 75 percent. The remaining 25% of the population will continue to rent, live in institutional housing (homes for senior citizens, retirement homes), or occupy mobile homes (as if these economists do not feel a mobile home is a "home"). In examining current land use and planning for the future, such predictions may prove correct. Not all individuals (or families) should own homes. Home ownership requires a substantial commitment and responsibility. In fact, the flexibility of renting suits some individuals’ needs better than ownership does. For people whose work requires frequent relocation or whose financial position or future is uncertain will particularly benefit from rental situations. Renting also gives renters more leisure time by freeing them from management and maintenance responsibilities.
Renting A Home vs. Owning a HomeBuying a Home as an InvestmentThe purchase of a home provides financial advantages to a buyer. The monthly mortgage payments that a homeowner makes represents an investment. An investment is the purchase of an asset that has the potential for profit. The profit may be in the form of current income received, or it may be a long-term gain due to increased value when the asset is sold. In the case of a home, as the owner reduces the mortgage debt, his or her equity (personal interest) in the property increases. Thus, the owner establishes financial security for the future by investing and building up equity in a residence that should increase in value. In addition, a homeowner enjoys substantial tax advantages not available to a renter. A prospective homeowner should consider these advantages before buying a home. In order to make a wise investment, however, the potential purchaser must also consider the value of the property in the future. The fact that a person can afford to pay for a particular home does not necessarily make it a wise investment. For most individuals, the purchase of a house is a major, long-term commitment. The buyer should be concerned with the future value and marketability of the investment. A home is not a liquid asset. If a home owner decides to sell their home, they must be patient if the home does not sell quickly.
Mortgage TermsIn the United States, private ownership of homes has increased from less than 20 percent of all families in the 1920s to approximately 70 percent in 1970. Two factors have made this possible: 1. A significant increase in the amount of a mortgage loan in relation to the total value of a home (called loan-to-value ratio) from only 40 percent in the 1920s to at least 80 percent in the 1970s to 90-100% in the 1990's. 2. An extension of the period of the mortgage loan payments from five years during the 1920s to twenty or more years today, on an amortized basis. An amortized loan is one that is repaid in regular installments of principal and interest over the term of the loan. The increased loan-to value ratio of today's loans and increasing repayment term (period) of mortgage loans have contributed significantly to increase the number of families that can afford home ownership, the further increases in this trend is doubtful. When the term of a mortgage loan is extended beyond the customary 20 to 25 years to 30 or even 40 years, the service (cost) of the debt (interest charge) increases substantially. Because of the interest charged over longer terms, a homeowner’s monthly payments reduce the total mortgage debt very slowly over the long payment period. Therefore, a buyer should carefully consider whether the longest mortgage term available is worthwhile if the home owner is interested in building equity (the excess of the current market value over the balance owed on the mortgage) in a home. While more than 80 percent of the purchase price may be borrowed from some lending institutions, it is wise for a prospective purchaser to have at least 20 percent of the purchase price available at the time of purchase. In some cases, a larger percentage of the total purchase price may be obtained by financing through the mortgage programs sponsored by the Federal Housing Administration or the Veterans Administration. Under these programs, loans may be secured from private lending institutions and the repayment of the loans will be insured by the FHA, or guaranteed by the VA. To increase home ownership opportunities for veterans, the amount of down payments required have been minimized. Perhaps one of the best ways by which a veteran can judge the value of the home he or she intends to buy is by the willingness of the FHA or VA to extend a maximum loan. When FHA and VA loans are offered and bear an appropriate relationship to the purchase price, a buyer can have confidence in his or her investment. There are a number of private mortgage insurance companies. Through their programs, a home buyer also can finance a purchase through a private lending institution with a higher loan-to-value ratio than he or she could otherwise obtain. Interest rates charged by banks on home mortgage loans vary as changes occur in the money market. In longer term mortgages (when interest charges represent a significant portion of monthly payments in early years), the prevailing interest rate when a mortgage is established may later prove to be very attractive or unattractive if prevailing interest rates change. If interest rates move up, an established mortgage with a lower interest rate may prove an attractive feature in selling a home if the loan is assumable. By contrast, if mortgage interest rates fall, the homeowner may be obligated to pay the higher rate for many years, particularly if the terms of the home buyers mortgage includes a prepayment penalty before a new mortgage loan can be negotiated at current rates. Homeowner ExpensesAlthough a portion of each monthly mortgage payment increases a homeowner’s equity in the home, the homeowner’s loan payment also includes an interest payment and payments to build up an escrow reserve for taxes and insurance. The portion of each monthly loan payment, which is applied to interest represents an expense to the homeowner. There are a number of other hidden expenses connected with home ownership, including real estate taxes, depreciation (the loss of value associated with use), insurance, maintenance and repairs, utilities, and other services such as garbage pick-up. In comparing the cost of a $900/month mortgage and a $900/mth rent payment, the cost of home ownership is significantly more than the cost of renting. Ability to PayIt is foolish for a person to buy a home without first evaluating available cash reserves for making a down payment and determining if their annual income is sufficient to meet the complete costs of home ownership. Guides have been established to help determine the amount of debt a prospective homeowner should incur. Many banks use the rule of thumb that the monthly cost of investing in and maintaining a home (mortgage loan payments plus real estate taxes and insurance) should not exceed 25 percent of the borrower’s total monthly income. Thus, an individual earning $12,000 per year ($1,000 per month) should not spend more than $250 per month towards mortgage payments on a home. Another rationale suggests that the amount of the mortgage loan should not exceed two times the total gross income of the borrower. Some lenders believe that the entire monthly financial responsibility, including mortgage loan payments and any other long-term debts, should not be more than one-third of the borrower’s monthly income. Some lenders are flexible in applying these guidelines depending on the borrower’s age, potential future earnings, number of dependents, and other variables.What Kind of Home to BuyAfter the buyer has decided to purchase a single-family home, the home buyer must evaluate the benefits of buying: (1) a used home, (2) a ready-built new home, or (3) building a new home to their specifications. Building a new home to personal specifications may satisfy the strong desires of planning and creating for one’s future, but the economics of such an undertaking may not prove to be the most attractive. Cost benefits are transferred to the builder, who can construct a number of standard or semi- standard floor plans and on the advantage of a large-volume operation. Often the purchase of an existing home also may offer economic advantages over buying a new home. In buying a new home or building your own home, you must consider area development, future depreciation, and structural defects in initial construction. These circumstance can be avoided by buying an older home, and because prices have already been discounted to reflect lack of newness, less speculative investment results. (Publisher note: Would you like to publish an article on this topic about Homes or other related topics? This article will be linked back to your own web site. Visit our Affiliate Publisher area to submit an article)
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