This excerpt of “Worth It… Not Worth It?” was reprinted with permission from Business Plus/GrandCentral Publishing.After an epic bust in the housing market, buying real estate might seem like a moronic financial move.
And for some people, it is.
But there is one single argument in the buy versus rent debate that trumps all others.
As professor Richard Green at USC puts it: You get to live in your piggy bank.
Your parents were at least partially right when they told you that renting was akin to “throwing money out the window.” Not because renting is inherently bad–in a perfect world you’d take the money you save every month by renting, invest in stocks and bonds, and 30 years from now you’d be richer than if you’d bought a house. But it’s not a perfect world; we all know you’d spend it on nicer cars and nicer dinners and nicer sneakers and 30 years from now you’d have the same amount of money but no house.
REASONS TO RENT
Add up the monthly mortgage bill, maintenance, homeowner’s insurance, and taxes. Then, even after subtracting the tax deduction, renting is probably cheaper. And that’s before you consider the down payment.
Do you really want to live in one place for the next 10, 20, 30 years? What if you are offered a great job–but it’s halfway across the country? Or you get engaged and the love of your life sets one condition–a 500-mile DMZ separating you two from your mother? If you own a home and it has lost value, you face difficult, expensive decisions.
A leaky roof. Ever-increasing property taxes. A backed-up septic system. Are you ready to deal with them? If not, enjoy the carefree life of a renter for a little longer. Houses won’t be skyrocketing in cost any time soon.
REASONS TO BUY
As we learned recently, a house isn’t a foolproof investment. But he requirement to stash that mortgage money away every month for 30 years is a powerful savings tool.
Purchasing a house today means buying a depressed asset with other people’s money borrowed at 4 per cent–and getting a tax deduction in the process. If inflation picks up, the real cost of that monthly payment will go down while rents climb. NOt a bad deal.
Peace of Mind
Depending on how quickly you pay off your mortgage, you’ll get to live rent-free in 30 years or so. You’ll be part of a community. Your kids can use thumbtacks to hang their posters, and you can sit on your porch knowing that the land under your feet and the roof over your head are all yours.
KEEP IT SIMPLE
30-Year-Fixed/20 per cent Down
When it’s time to get a mortgage, learn one number and two words: 30-year-fixed. Mortgage rates haven’t been this low since GIs were heading home from France. Lock in a low monthly payment and you’ve just taken a huge step in protecting your family against inflation. Shoot for a 20 per cent down payment. Banks will let you get away with less, but we’ve seen how good banks are at judging risk.
With 20 per cent down, the chances that you’d ever end up underwater (owing more than the house is worth) are extremely slim, plus, you won’t have to pay mortgage insurance.