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Renting versus Buying
Compareand Contrast le advantages and disadvantages of renting or buying a home.
Analyze costs involved in renting and buying.
Assess different types of home ownership.
Describe financial guidelines that can help determine a realistic housing budget.
RENTING PROS AND CONS
Renting means paying money to live in a dwelling that is owned by someone else. Landlords, or owners, offer renters called tenants—many types of housing, from small efficiency apartments to single-family houses. Rental housing is available either furnished or unfurnished and in all price ranges.
ADVANTAGES OF RENTING
A young college graduate with a new fulltime job is living away from home for the first time and needs a small, inexpensive place to live. A couple with two children want to live in a single family house. A retired couple want to try living in a warmer climate for a few months before deciding whether to move there permanently. For these people, and for many others, the best choice may be to rent a home. Rental housing offers several advantages.
PREDICTABLE HOUSING COSTS
Renters typically know what their monthly housing cost will be. They don't have to worry about unexpected repair bills. Money that otherwise might be spent for maintenance and improvements can be saved.
Some people do not want to commit themselves to the long-term responsibilities of home ownership. They may have to move often because of their jobs, or they may be unsure of the type of housing that will be most comfortable for them. Some people may not be sure their income will remain steady for a long period. Renting gives them flexibility.
DISADVANTAGES OF RENTING
While renting a home has many advantages, there are also some possible disadvantages. Renters have limited control or freedom when renting a home. They also may feel a lack of stability or permanence. In addition, people are at a financial disadvantage when they do not own the home in which they live.
LIMITED FREEDOM AND CONTROL
The major disadvantages of renting relate to control over living space. Renters may have little or no voice in how the building is managed or maintained. They often do not have the freedom to make changes in decor, such as painting and papering walls, without getting the landlord's permission. Some landlords do not allow pets or restrict the number and type of pets that tenants can keep. Landlords may have adults-only policies. Some restrict the hours when a tenant may have guests.
LACK OF PERMANENCE
Rental housing often does not encourage a sense of community.Tenants may move in and out so often thatthere’s no feeling of permanence or belonging. Unlike homeowners, renters often feel that their neighbors are strangers and may not get to know them as well. They often do not feel a sense of stability.
Money spent on rent is not applied toward ownership. After paying rent for years, renters have no investment in property to show for their payments and no tax savings. At the end of the rental agreement period, a landlord will often raise the rent. The renter must pay the increase or face the disruption and expense of moving. In many cases, monthly rent can cost more than a monthly loan payment for a similar size home.
BUYING PROS AND CONS
Owning a home has been a traditional dream for many people because it, offers a unique sense of satisfaction. The most common type of housing that is purchased is the freestanding, single-family house set on its own lot. However, units in multifamily dwellings may also be purchased. For example, one form of home ownership, called condominium ownership, involves individual ownership of units in a multifamily dwelling, such as apartments or town houses. The purchase of a home is a major decision, regardless of the type of housing. Like renting, buying has advantages and disadvantages that should be carefully weighed.
ADVANTAGES OF HOME OWNERSHIP
When choosing home ownership, there are several significant advantages. Some of these advantages include:
FEELING OF BELONGING
Home ownership provides a feeling of stability and a sense of "putting down roots." Many homeowners develop a sense of community awareness and responsibility. Homeowners often want to participate in local government. This helps people feel they can protect the value of real estate in their area and help determine how tax money will be spent.
Buying a home is an investment. The cost of the home and the money put into maintaining it are not lost, as they are with renting. Rather, the homeowner is exchanging one form of wealth (cash) for another (real estate). Over the last several decades, the value of real estate has generally risen. If a home is kept in good condition, and if the economy is sound, its value will probably rise. Chances are, the owner will be able to sell the home for more than he or she paid for it.
In cooperative ownership, a nonprofit corporation owns a multifamily dwelling, with owners purchasing stock in that corporation. As a benefit of investing in the corporation, the buyer receives an apartment. The amount of stock a buyer must purchase is determined by the value of the apartment. In addition to the initial investment, each owner pays a monthly fee for maintenance and security.
Members of the cooperative, or co-op, have a voice in how the corporation is run and in the selection of their neighbors. Owners are usually represented by a board of directors. If an individual or family wants to join the co-op, the board votes to decide whether to admit them. Therefore, owners cannot sell their units without permission from the board.
Cooperative ownership of a multifamily dwelling can be an attractive option. It combines the advantages of home ownership with the convenience and freedom of apartment living.
Condominium ownership is similar to cooperative ownership. It, too, involves multifamily dwellings such as apartments or town houses. In condominium ownership, however, the owner purchases his or her unit and a share of the common grounds. An owner may sell a unit without permission from other owners.
The Land, driveways, and other shared areas of the complex are owned in common by all residents. Owners pay a monthly fee to maintain these common grounds. Usually, a homeowners' association or a condominium board governs the use of the common areas and decides on improvements. Each member votes in proportion to the value of the unit or units owned. As in cooperative ownership, an individual owner might not always agree with the decisions made by the association, which may be a source of conflict with other members.
GOOD CREDIT RECORD
Because they make regular monthly payments to a bank or other institution, homeowners generally have good credit records. This helps them establish a reputation for promptness and reliability that can help them qualify for loans in the future.
Homeowners enjoy income tax savings. Interest—the money that the lending company charges the buyer for a loan—can be deducted from the income amount used to figure taxes. Property tax payments are also deductible.
DISADVANTAGES OF BUYING A HOME
While owing a home has benefits, there are possible disadvantages to think about, too. These include:
With home ownership comes the responsibility for maintaining the home. Although improvements such as adding a deck or remodeling a kitchen can be planned and saved for, many maintenance expenses arise without warning and need immediate attention. For example, a water heater may need replacing, or a roof may develop a leak. These problems can be expensive. If damage is due to an accident, homeowners insurance may pay a portion of the cost of repair. Often, however, problems arise simply as a result of wear and aging of the home.
A CLOSER LOOK AT COSTS
Finances are a major factor to consider when deciding whether to rent or buy. Both buyers and renters need to consider two types of costs: the initial costs that must be paid once, and the continual costs that must be paid every month or year.
RENTER'S INITIAL COSTS
When looking for a place to live, first-time renters usually pay close attention to the monthly costs that will be involved. Many, however, do not realize that they need to set aside some cash for the initial expenses of moving into rental housing. Awareness of these initial costs can help renters handle them as planned expenses, rather than as an unpleasant surprise
Before moving into a rental unit, a renter is usually required to pay a security deposit, a fee that covers the cost of any damage the renter might cause to the unit. The deposit may be equal to one or two months' rent. Renters who own pets often must pay an additional security deposit called apet deposit. When the renter moves out, the security or pet deposit is returned if the unit is left in good condition. However, if the renter has damaged the property, the landlord keeps all of the deposit to pay for repairing the damage.
ADVANCE ON RENT
Some landlords of rental units require payment in addition to a security deposit. A renter may have to pay one month's rent (or more) in advance before moving in. A landlord considers this advance as a type of "insurance" if a renter moves out unexpectedly, leaving a unit vacant.
MOVING AND OTHER COSTS
When planning for initial expenses, renters should not forget the costs of actually moving into their, new home. Professional movers charge tee to move furniture and other household goods.
RENTAL CONTINUAL COST
The monthly cost of the apartment is, of course, a major consideration. Rental costs depend on many factors such as the size of the unit, the age of the building, and the services that are included. A renter may have to give up one amenity, such as more space, to gain another, such as paid utilities. Renters who do not already own furniture might consider paying slightly more to rent a furnished apartment.
Sometimes the costs for services such as water, natural gas, electricity, and trash collection are paid by the landlord and are included in the rent. Other times, the tenant pays for some or all of these utilities, as well as for telephone service. If paying for the utilities is the tenant's responsibility, money needs to he set aside for these costs each month.
Sonic rental units charge an additional fee for garage space. This is particularly true in a city apartment building that has all underground parking garage, where space is at a premium.
BUYER'S INITIAL COSTS
The initial costs of buying a home are usually much higher than those involved in renting. Most people plan for many years before buying a home because of the amount of money involved.
Few people can save up enough money to pay the purchase price of a house in cash. Most people must borrow part of the money to pay for a home. A number of costs associated with financing a home arise at the time the purchase is made.
APPLICATION AND CREDIT CHECK FEES
Before loaning a substantial amount of money to buy a home, banks and other financial institutions check the buyer's credit to see whether that person is a good risk. The bank looks to see if the buyer has any large outstanding debts and has the income to pay the monthly bills. The buyer usually has to pay the fee that covers the cost of this credit check.
When a buyer is seriously interested in a particular house, it is wise to have it inspected. Many buyers hire a professional home inspection Company. These firms send engineers to the home to check the structure, the roof, and the plumbing, electrical, and heating systems. They also check for pests, such as termites. Some firms will estimate the cost of any needed repairs.
People are rarely allowed to borrow the entire price of the home they buy. They are usually required to make a down payment, or a deposit of cash, at the time of the purchase. The down payment may be from 5 to 25 percent or more of the purchase price, depending on what the financial institution requires. The more money a buyer puts down, the less expensive monthly payments will be.
In addition, buyers are required to pay all or part of the closing costs fees due at the time the purchase is finalized.These fees usually total several thousand dollars.
MOVING AND OTHER COSTS
Like renters, homeowners should plan for the expenses of moving and connecting utilities. In addition, they may want to, or need to, spend money on appliances, lawn and garden tools, and other useful items. If they have purchased a newly constructed home, landscaping may be a major expense. Doing landscaping work in stages over several years can reduce initial costs.
BUYER'S CONTINUAL COSTS
Once buyers move in, their monthly costs begin. These include a monthly mortgage payment, utilities, taxes, household insurance, and maintenance on the property and
BUYER’S CONTINUAL COSTS
MONTHLY MORTGAGE PAYMENT
Unlike a loan to buy a car or a television, a mortgage, or home loan, is long term. Most require making monthly payments for 15 or 30 years, although some are offered for other periods of time.
A monthly mortgage payment includes two components. They are the principal or the portion of money paid to reduce the original amount of the loan andthe interesta portion of the fee that the lending institution charges the buyer to borrow the money.
At first, most of each mortgage payment goes toward paying the interest on a loan, with a small amount going toward paying the principal. Near the end of the loan term, more money goes toward paying principal. This can vary with different types of home loans.
Homeowners are required to pay real estate, or property, taxes. Often this cost is added to the monthly mortgage payment. The taxes are based on the value of the home and are used to pay for such community services as schools, libraries, street repairs, and parks.
Homeowners should carry household and liability insurance. Household insurance covers the cost of repairing or replacing object damaged by fire, theft, or other hazards. Liability insurance covers any claims filed against the homeowner by persons who are injured on the property. Most mortgage holders require the buyer to protect the home by purchasing insurance. Sometimes, one-twelfth of the estimated yearly insurance premium is added to the monthly mortgage payment.
WHAT CAN YOU SPEND ON HOUSING?
Before looking for a Place to rent or buy, you should decide how much you can afford to spend on housing. One rule of thumb is to spend no more than 28 percent of monthly income on a mortgage or rent payment. However, this varies according to your situation. Some people may want to stretch their budget to spend more on housing, while others prefer to spend less.
Careful planning can help you obtain affordable housing that meets your needs. Take a close look at your financial picture, and determine how much you can spend. Also, consider what other resources might be available to help you.
Income is the money received for work done or from investments made. For purposes of housing, it is important to determine monthly and yearly income. Is it steady, or does it vary from month to month? If a person's income varies, he or she must take that into consideration when planning for housing. Monthly mortgage or rent payments must be paid whether or not a person has received income that month.
It's a good idea to keep track of your monthly expenses for a few months. This will help you estimate upcoming expenses.
Expenses are of two main kinds fixed and flexible. Fixed expenses must be paid regularly, and the amount is fairly constant. Rent is a fixed expense. Many people look upon regular deposits to a savings account as a fixed expense. Certain other types of expenses are flexible; that is, they vary in amount and do not occur regularly.Clothing is a flexible expense. Remember to include payments on existing debts, such as an installment loan for a car, as expenses.
Both homeowners and renters need to consider the significance of savings as part of their financial plans. Life is full of unexpected—and often expensive surprises. Without savings, it can be difficult to cope with unplanned needs. Homeowners need money for a down payment and closing costs. They might need money suddenly for expensive home repairs. For a renter or homeowner, it may be a need unrelated to housing, such as an emergency medical expense. Both homeowners and renters should ask themselves: "How much savings do I have now?" and "What can I save each month?"
STRENGTHENING YOUR FINANCES
After looking at your finances, you may decide you need to make some changes. Here are some ideas:
Make a budget—a financial plan.
Set aside savings first instead of saving what's left over.
Reduce flexible expenses.
Reduce current debt.
Limit impulse buying. (Stick to your plan.)
Continue keeping records so you know how your money is used.
USING OTHER RESOURCES
Resources can he used to lower the costs of buying and maintaining housing. People who are willing to invest time, energy, and talent in their homes can save money and at the same time increase the livability of their homes. For example, someone who builds or assists in building his or her new home lowers the final cost of the home by saving on construction costs. Others save by completing their own home repairs and maintenance. Consumer friendly products—such as self-adhesive floor tiles, water-based paint, and precut and prefinished wall panels—have encouraged this trend.
People who are skilled in sewing or in carpentry can make things for their homes that might be expensive to buy. For example, a person who sews can design and make window treatments for a home. A carpenter can build wooden shelving to create a room for a library. Doing things yourself takes time and energy, but it can also add greatly to the livability, convenience, and value of a home. Making good use of your human resources can also give a great deal of personal satisfaction and enjoyment, allowing the money saved to be spent for other things.
Renting and buying a home both have advantages and disadvantages.
Landlords and tenants are the two parties involved in renting a home.
Multifamily units may be purchased through cooperative or condominium ownership.
Finances are a major factor to consider when renting or buying a home.
Renters and buyers have differing initial and continual costs.
Renters and buyers should carefully determine what they can afford to spend on housing.
Keeping simple financial records can help in determining how much can be spent on housing.
RECALLING THE FACTS
1. Explain why fixed costs and limited maintenance are advantages of renting.
2. What are the financial disadvantages of renting?
3. How is owning a home a good financial investment?
4. Explain why having responsibility for maintenance might be a disadvantage to homeowners.
5. What might be one drawback to cooperative ownership?
6. Name three initial costs of renting.
7. What is a mortgage, and how is it different from a regular bank loan?
8. Explain the difference between fixed expenses and flexible expenses, and give an example of each.
1. Why is buying home a major life decision?
2. If you could rent a one-bedroom apartment or purchase one as a condominium, which would you prefer to do? Do you think your opinion will change in two years? In six years? Explain.
3. If you had a friend who was looking for a home to rent, what advice would you give him or her to determine how much to spend?
4. If you bought a home, would you rather hire someone to make improvements and repairs and do maintenance, or would you rather do them yours Why?
ACTIVITIES AND APPLICATIONS
1. Analyze Rental Costs Research the costs of renting an apartment in your area, using the classified advertisements in a newspaper. Prepare a list of apartments by size (efficiency, one bedroom, two bedroom, etc.), location, and cost. Explain what extra features are offered by the more expensive apartments in each size.
2. Research Repair Costs make a list of several maintenance jobs that might he required on a home. Ask an employee at a hardware or home improvement store about tools and supplies that might be necessary for each repair. Find a total cost for each repair if you were able to do it yourself.
3. Comparing Housing Decisions Interview several older members of your family about housing decisions they made when first' out on their own. What housing alternatives were available to them? What factors entered into their decisions? How do housing decisions made in years past compare and contrast to decisions People must make today? What factors may account for the differences?
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