Lifestyle and finances play important roles in making a decision between buying or renting a home to live in. Without a doubt, home ownership has pros and cons. One of the more important cons that first time buyers often overlook is that ownership is much more complicated both in the process of buying a house and maintaining it. Here is a snapshot for buying a house:
There is little doubt that the purchasing process is much more complicated than the renting process. However, there are clear financial benefits to buying. The first of which is you begin building equity in the house. It’s like an automatic savings account that you can benefit from in retirement or draw from during a financial emergency.
There are also large tax deductions that go beyond writing off mortgage interest and mortgage insurance. Having a mortgage often enables you to itemize deductions that you otherwise can’t write off. These can range from charity donations to home office expenses and include property taxes. When you rent, you are almost certainly paying the mortgage and other expenses on behalf of the landlord but not able to take advantage of the tax write offs.
A major con side of the equation was experienced by millions of people when the real estate market bubble burst in 2007. There is no guarantee your home will increase in value. When prices dropped, millions of people found their mortgages where underwater (they owed more on the mortgage than the home was worth).
As an owner, you become responsible for all maintenance and repair costs. This can include expensive items like a new roof or heating system. These issues can come up at times when you are already having financial problems. If you don’t have a maintenance and repair savings account, you’ll be in even deeper financial trouble. However, if you have built equity in the home, you can draw on this equity to make emergency repairs.
It takes time to build equity. You can’t just pick up and move when a lease is over. On average, it takes about seven years before you begin building true equity. Before that, you’ll lose money if you are forced to sell. During those seven years, you recover the costs of purchasing the home, which includes mortgage applications fees, the inspection costs, mortgage points, and other costs. Additionally, when you go to sell, you typically have to pay the realtor a commission.
There are currently about 11,000 homes on the market in Memphis. The good and bad news is that housing prices in Memphis have been on the rise. According to the latest Case-Shiller’s home price report, metro Memphis home prices are up 8% year-on- year. The good news is that prices are on the rise. The risky news is that you want to buy low. Prices may have already reached a point where future appreciation in value will slow or come to a halt.
Still, Memphis remains a bargain hunter’s delight. The median home price of $122,000 stands at 2.2 timesthe median income of $56,400, an encouraging ratio. The average in the United States is 2.8. At $122,000 with a 10% down payment and a 30 years mortgage, your monthly payment will be about $685 including property taxes but excluding homeowners insurance.
Two bedroom apartments are renting on average for $783. A three bedroom with a two-car garage is going for about $1,800 in monthly rent. Financially it is clear that homeownership is the better deal. For your $685 per month, you get a three-bedroom house with a fenced yard for the children to play in.
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