Buying a home is a huge step. Buying a home takes savings, credit, banks, realtors, lawyers, and a number of other institutions and individuals that are complex and time consuming. The great thing though is that owning the home is a huge step of actual freedom. Every month a sizeable portion of the paycheck is not going towards rent, or in other words, someone else’s equity. A homeowner is free to decorate, remodel, repair, and most importantly, sell the home and recover costs and hopefully earn money on the investment.
Homes have historically risen in costs. Homes are situated on real property that will most likely appreciate in value. Home appreciation has its catch though and that is that it takes time, energy, effort, and patience. When a home is sold or bought, there are several costs that are relatively high involved in the transaction such as the closing costs and the simple cost of moving. You should not buy a home unless you are relatively positive you can live in the home for up to four to five years. The early payments on the mortgage are mainly interest and don’t start really paying the equity until the loan is closer to being repaid. This means that a homes worth really comes from the naturally rising price of real estate.
Things get especially scary when the price of a home falls. Homes are truly expensive. They are usually the most expensive object that a person will invest in or purchase in their lifetime. The hope is that home prices will not fall. In the long run most homes will not lose their value but there are a few great examples recently of home prices falling and when a home is super expensive, a falling home price can be truly detrimental to the investor as they will not be able to afford the huge loss in the value.
Most of the time, the argument to own is a lot stronger than the argument for renting. But in certain situations, renting is the right thing to do. If a potential home buyer is in a job that is changing and they are improving or working their career, and are likely to be asked to move, then renting is a better idea as the moving costs are so much lower than trying to sell a home and the transaction costs involved. Also in a decreasing housing market, renting is the only way to go, for obvious reasons.
The best rule of thumb though one should consider is how much less of a monthly payment will one have to pay in the short run when it comes to either renting or buying. If renting is more than 35% less, then it is a great idea to rent. That is enough of a difference that one will be saving a lot of money in the long short run if they are renting. Meaning, in the total long run of things, home ownership is better as the increase in the value of the home will be great but in the short run, if one is planning on moving, and renting is 35% less of a payment each month, then renting is the option one should go with.
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