Friday, April 13, 2007

Rent Versus Buy

I recently worked with a Detroit transplant who is about to begin a medical residency in Chicago and she could not decide if she should buy a new home or rent one for a year before buying.

We spent a productive day together, focusing on the South Loop neighborhood (including Printers Row and Museum Campus) to determine what her money could buy in that neighborhood. After a day of surveying the land, as it were, she made a decision.

She chose to rent.

She made the correct decision.

Hold the phone! Here's a real estate agent encouraging someone to rent a home. What's this blog coming too?

As I've said before, and not for the last time, home ownership is a financial decision and an emotionally-enriching personal one. A part of the bundle of rights, provided by the U.S. Constitution, that comes with owning real estate is "use and enjoyment". A home buyer needs to find a home that will make him or her happy. A place where she can study for the boards. A place where he can host Super Bowl parties. A place where they can raise a family. It should be in a neighborhood that meets YOUR needs.

Another part of owning real estate is the financial benefits. There is investment value and appreciation. There's the importance of building equity. Don't forget the tremendous tax benefits that come from paying interest on a loan, property taxes, and thanks to Congress in 2007, even some tax write-off for PMI (mortgage insurance).

There many reasons to rent a home, though fewer than in olden days. If you are moving to a new city and aren't sure what neighborhood is the one for you, you might want to rent. Buying a home is a minimum two to three year proposition. If you're going to move in a year, don't buy. Finally, if you cannot afford to purchase a home, then you should wait until you can.

Financing for home buyers has changed a great deal in recent years, for better and for worse. It used to be that you needed to have 20% of the purchase price to put down in order to buy a home. That all changed. In the last few years, you needed merely to have a heart beat and have paid at least one phone bill in your lifetime to get a loan. Lenders were putting people in homes with zero money down and with loans that did not require individuals to put any equity at all into their home. These arrangements are well suited for some, but were taken on by many more...

This year, the industry as a whole has cracked down to reel in these types of financial arrangements in hopes of avoiding defaulted mortgagees and foreclosed properties. They are creating an environment where home buyers can get the type of mortgage that they can reasonably be expected to manage.

Simply put, if you believe you might be able to afford a home, you probably can. You should find a lender you can trust, or ask a Realtor you can trust to refer you to a lender that they trust. Share your income situation and your credit history with them. If you are risk averse, tell them that you're financially conservative. They will be able to tell you, within minutes, what you can realistically afford, and what that means in a monthly payment.

When you are ready to buy a home - you are financially prepared, you generally know what will make you happy, and you plan to be in one place for at least 30 months - you absolutely should be investing in a home. Your home.

When you do buy it, use it and enjoy it! You can knock down walls or build new ones. Try that in your old apartment!! (Actually, don't.) Paint it. Hang your pictures. Make a home office. Design a new closet layout. Sleep in on Sundays. Call me and thank me. Send me your friends and neighbors! You won't be disappointed.