Who says you have to own a home to live the American dream? Renting can actually be better for your pocketbook and lifestyle.
Before the housing boom went bust this year, homeownership was considered a good investment. But now, with the rash of mortgage foreclosures, renting may be a more attractive option. Here’s why.
1. Renting can save money
According to popular myth, renters are just throwing their money away. But the reality is that when you buy a home, you’re paying for closing fees, mortgage interest, property taxes, private homeowners’ insurance and maintenance — costs that return nothing on your investment. You’d be better off banking that money or putting it into the stock market. In fact, a recent study by Fidelity Investments indicates that stocks provided investors with nearly 4.6% higher average returns in the past 45 years than real estate.
2. Homeowners’ tax deductions are overstated
Conventional wisdom says that buying a home saves you money because the mortgage interest is tax-deductible. But a study by the National Multi Housing Council – a national advocacy group representing the interests of large apartment firms in the U.S. -- points out that half of homeowners don’t get a break, because even with mortgage interest and property taxes, their total deductions do not exceed the standard federal tax deduction ($10,900 for couples and $5,450 for singles).
IF YOU WANT TO BUY...
Be an attractive risk. Your credit score determines the interest rate a bank will give you on a mortgage. The difference between decent and terrific credit can add tens of thousands of dollars over the life of the loan. To improve your rating, pay down your credit-card bills. Lenders want to see that your debt doesn’t exceed 30% of your available credit. But don’t close an account once you’ve paid it off—doing so actually will hurt your score.
Buy only what you can afford.
Most banks now require a down payment of 20%, but if you’re an attractive borrower, 10% may suffice. Still, the less you put down, the more you’ll pay in fees and interest. Spend no more than a third of your total pre-tax income on housing costs: mortgage, homeowners’ insurance, maintenance and property tax. Figure maintenance to be about 1% of the value of your house each year.
Choose your loan carefully.
Many homeowners are in trouble because they took out adjustable mortgages with low interest rates that later spiked. A 30-year, fixed-rate mortgage is your best bet—adjustable mortgages don’t offer the rate breaks they did during the boom. Use the Internet to do your research. You’ll find articles, statistics and general resources that will help you determine which banks offer the best rates in your area and around the country.
Lowball ’em. Bidding wars over a house are uncommon in today’s climate. Sellers anticipate having to drop their asking price, so don’t bite at the listing price. Bid low and see if the seller will come down.
IF YOU WANT TO SELL...
Think twice before you sell. This is a bad time to expect big returns. If you don’t have to sell now, don’t. Make inexpensive improvements and wait until market factors are more in your favor.
Find the best broker.
A year ago, you could have asked agents to cut their commissions because houses sold themselves. Now you’re better off paying the full 6% to ensure you’ll get the best service. Local agents are best. They know the selling points of your community—and your house—and can be present to show it to buyers at a moment’s notice. Look for pros with at least eight years’ experience. If they worked in the business before the boom, they’ll do more than just weigh the best offers.
Make sure the price is right.
A good agent will know what numbers get the best response from consumers. Studies show that buyers react to break points, or psychological limits. For example, a buyer with a budget of $250,000 may be willing to pay $249,000 but not $251,000. If your home is valued at $310,000, consider listing it at $300,000 or even $299,000 to maximize its sales potential.
Know which way the wind is blowing.
Pricing in a free-falling market is dicey. Brad Inman, publisher of a real-estate trade publication, recently helped his parents sell their condo in Las Vegas. Pricing it at a market value of $185,000 to $195,000, he says, would have been a disaster. “We had to anticipate how much prices would fall in the time it would take to close [30 to 60 days].” So they listed the condo at $179,000 and accepted an offer of $175,000 while comparable condos lingered on the market until owners cut prices by $10,000 to $20,000. “You want to avoid time on the market to stay ahead of the falling knife,” says Inman.
Before the housing boom went bust this year, homeownership was considered a good investment. But now, with the rash of mortgage foreclosures, renting may be a more attractive option. Here’s why.
1. Renting can save money
According to popular myth, renters are just throwing their money away. But the reality is that when you buy a home, you’re paying for closing fees, mortgage interest, property taxes, private homeowners’ insurance and maintenance — costs that return nothing on your investment. You’d be better off banking that money or putting it into the stock market. In fact, a recent study by Fidelity Investments indicates that stocks provided investors with nearly 4.6% higher average returns in the past 45 years than real estate.
2. Homeowners’ tax deductions are overstated
Conventional wisdom says that buying a home saves you money because the mortgage interest is tax-deductible. But a study by the National Multi Housing Council – a national advocacy group representing the interests of large apartment firms in the U.S. -- points out that half of homeowners don’t get a break, because even with mortgage interest and property taxes, their total deductions do not exceed the standard federal tax deduction ($10,900 for couples and $5,450 for singles).
IF YOU WANT TO BUY...
Be an attractive risk. Your credit score determines the interest rate a bank will give you on a mortgage. The difference between decent and terrific credit can add tens of thousands of dollars over the life of the loan. To improve your rating, pay down your credit-card bills. Lenders want to see that your debt doesn’t exceed 30% of your available credit. But don’t close an account once you’ve paid it off—doing so actually will hurt your score.
Buy only what you can afford.
Most banks now require a down payment of 20%, but if you’re an attractive borrower, 10% may suffice. Still, the less you put down, the more you’ll pay in fees and interest. Spend no more than a third of your total pre-tax income on housing costs: mortgage, homeowners’ insurance, maintenance and property tax. Figure maintenance to be about 1% of the value of your house each year.
Choose your loan carefully.
Many homeowners are in trouble because they took out adjustable mortgages with low interest rates that later spiked. A 30-year, fixed-rate mortgage is your best bet—adjustable mortgages don’t offer the rate breaks they did during the boom. Use the Internet to do your research. You’ll find articles, statistics and general resources that will help you determine which banks offer the best rates in your area and around the country.
Lowball ’em. Bidding wars over a house are uncommon in today’s climate. Sellers anticipate having to drop their asking price, so don’t bite at the listing price. Bid low and see if the seller will come down.
IF YOU WANT TO SELL...
Think twice before you sell. This is a bad time to expect big returns. If you don’t have to sell now, don’t. Make inexpensive improvements and wait until market factors are more in your favor.
Find the best broker.
A year ago, you could have asked agents to cut their commissions because houses sold themselves. Now you’re better off paying the full 6% to ensure you’ll get the best service. Local agents are best. They know the selling points of your community—and your house—and can be present to show it to buyers at a moment’s notice. Look for pros with at least eight years’ experience. If they worked in the business before the boom, they’ll do more than just weigh the best offers.
Make sure the price is right.
A good agent will know what numbers get the best response from consumers. Studies show that buyers react to break points, or psychological limits. For example, a buyer with a budget of $250,000 may be willing to pay $249,000 but not $251,000. If your home is valued at $310,000, consider listing it at $300,000 or even $299,000 to maximize its sales potential.
Know which way the wind is blowing.
Pricing in a free-falling market is dicey. Brad Inman, publisher of a real-estate trade publication, recently helped his parents sell their condo in Las Vegas. Pricing it at a market value of $185,000 to $195,000, he says, would have been a disaster. “We had to anticipate how much prices would fall in the time it would take to close [30 to 60 days].” So they listed the condo at $179,000 and accepted an offer of $175,000 while comparable condos lingered on the market until owners cut prices by $10,000 to $20,000. “You want to avoid time on the market to stay ahead of the falling knife,” says Inman.
