You probably have seen a rent-versus-buy calculator here and there online, and you may have even used one. They are supposed to help you decide if buying a house makes financial sense for you, but do they really tell you what you need to know? Let's take a look at how they work, and how they sometimes don't.
To Rent Versus Buy
The idea of these calculators is to take into account all the costs of both renting and buying over a given time, to compare them and see which option is better. There are a number of criteria involved, though, and this means there will always be some guessing. How many years will you be in the home? How much will rent be up to in ten years? How high will your property taxes be? These fields will be filled in by default in most calculators, and you'll change them as needed.
I just went to the U.S. Government's site, ginniemae.gov to see their rent-versus-buy calculator. Their fields start (mid 2007) with an assumption of ten years in a house, a 7.5 annual appreciation - all very conservative guesses. Here is what all of the criteria were preset at:
Your Current Monthly Rent: $750 The Price of Home: $150,000 The Down Payment: $15,000 (10 Estimated Years In The Home: 10 Annual Property Tax Rate: 1
You can change any of these. For example, property taxes are closer to 2 annually (although it could well be a negative number this year and next). Hitting the "calculate" button, this is what was shown:
Home Value In Ten Years: $182,849 Loan Balance After 10 Years: $117,340 Your Equity: $65,509 Tax Savings (at 28 loan would be $944 per month, not $550 - and this doesn't include mortgage insurance, property taxes or home owner's insurance. They may take into account the tax savings, but that still doesn't explain how they arrive at $550. There is this little note at the bottom:
"The above rent-versus-buy calculator uses the following in its calculations: homeowner's insurance, loan costs, mortgage insurance, cost to sell the home, property tax, homeowner's tax savings, and increases in rent. Results are estimates. "
Well, that certainly doesn't clear things up, but it does point out some other issues, like the fact that there is no calculation at all for repair costs. Having owned several homes, I can tell you that there will be repairs and maintenance. We also don't know if rising property taxes were taken into account. Also if you are in the 15 interest rate, the monthly cost of owning a $150,000 home (with taxes, insurance, and minor repairs) is a minimum $1,150 - and probably higher than that. Using the above example, this is $400 more per month than renting. My guess is they take into account the "opportunity cost" of not having that $400 per month to invest over 10 years. That might even surpass the equity gain from owning.
Buying is often a good idea, especially since you probably won't invest that $400 monthly in extra cash flow you get from renting. But do some of your own thinking, understand what criteria are being used, and be skeptical of these rent-versus-buy calculators.
Answer: You'll love the feeling of having something that's all yours - a Cincinnati home where your own personal style will tell the world who you are. A thriving vegetable garden in the backyard, a tiled entryway, a yellow kitchen... when you own, you can do it all your way! But there's more to owning a Cincinnati home than personal satisfaction. You can deduct the cost of your mortgage loan interest from your federal income taxes, and usually from your state taxes, too. And interest will compose nearly all of your monthly payment , for over half the number of years you'll be paying your mortgage. This adds up to hefty savings at the end of each year. And you're also allowed to deduct the property taxes you pay as a homeowner. If you rent, you write your monthly check and it's gone forever. Another financial plus in owning a Cincinnati home is the possibility its value will go up through the years.
There are advantages to buying a Cincinnati home versus renting. View these advantages in a financial comparison of buying versus renting in the Buy vs. Rent Calculator.
Savings: Buying
In many cases, the amount of money a renter spends on rent can be about the same as or less than the amount a homeowner spends on a mortgage. With the tax benefit for homeowners, the savings can be significant.
Buy vs. Rent Comparison
The renter starts out paying $800 per month with annual increases of 5% The homeowner purchases a Cincinnati home for $110,000 and pays a monthly mortgage of $1,000 After 6 years, the homeowner's payment is lower than the renter's monthly payment With the tax savings of homeownership, the homeowner's payment is less than the rental payment after 3 years
Monthly Expenses: Buying
Your rental company takes part of your rent payment to cover certain housing expenses. When you decide to purchase a home, you accept responsibility for paying for these expenses (listed below). They are additional costs to your monthly mortgage payment and should be included in your budget estimates:
Cincinnati Home Taxes and Special Assessments
Home/Hazard Insurance
Utilities
Maintenance
Home Owner Association (HOA) Fee: Doesn't apply to all purchases. It pays for trash and snow removal and maintenance of common grounds if applicable.
Membership Fee: It may pay for recreational facilities and other services (cable TV).
Looking for an apartment? It can be both exciting - and frustrating! But if you approach the whole process systematically and if you know your rights, apartment hunting doesn't have to be a hassle. Read through this Renter's Kit before you begin. And happy hunting!
Before You Start Looking...
Know your rights and responsibilities: Federal law prohibits housing discrimination based on your race, color, national origin, religion, sex, family status, or disability. If you have been trying to rent a Cincinnati home or apartment and you believe your rights have been violated, you can file a fair housing complaint. When you live in an apartment, you have both rights and responsibilities. Be sure you know what's expected of you - and what you can expect in return.
Figure out what you need: It's a good idea to think through what you need in an apartment BEFORE you begin shopping. How many bedrooms do you need? Do you need to be close to schools? Do you need parking? Make a list before you begin...that will help you narrow down your search.
Both Steve Gillman & Sandy Bakst are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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