By Ilyce R. Glink with Samuel J. Tamkin
Saturday, April 25, 2009
Thanks to declining mortgage interest rates and housing values, these days it's a lot less expensive to buy a home. On the other hand, it's also less expensive to rent.
Sometimes deciding whether to rent or buy is easy. If you're not planning to live in the same neighborhood, city or state for more than five years, renting becomes the more economical option. If you are likely to change jobs or careers and your income might going down, renting is a safer choice.
And if your family needs are changing or will change dramatically over the next five to seven years, you might be better off renting the size home you'll need over the next few years rather than buying one that your family will outgrow.
(There's an old real estate joke: If you want to get married, buy a studio apartment.)
My friend Josh is trying to make the rent vs. buy decision. He shared with me a fancy spreadsheet he created to weigh factors like the opportunity cost of his cash down payment.
Opportunity cost is a business term that essentially compares how much you would earn on your cash if you invested it in one type of investment vs. another. In this case, Josh is trying to determine what he would earn on his cash if he left it in a certificate of deposit rather than using it as a down payment.
He also looked at the costs of buying, financing and selling the property. Loan fees have risen sharply in the wake of the housing and credit crisis. He also had to add in the cost of taxes (not just property taxes, but also local stamp taxes and other taxes and fees charged for escrow accounts). He adjusted the costs upward to include annual maintenance, and I thought he should have added in a few extra bucks to repaint the property when it comes time to sell. After factoring in the costs of buying, financing and selling the property, he then projected that housing prices would continue to fall a little before starting to rise modestly over the next five years.
When Josh compared all of this with the costs of simply renting a similar property, he came to the conclusion that over the first five years, renting is far less expensive than buying a property. In fact, he believes that he would save tens of thousands of dollars simply by renting rather than buying.
But the calculus changes as the years go on and positive appreciation kicks in. At about the five-year mark, buying a home starts to look like a smarter (and less expensive) move than renting.
In fact, that's how real estate should be thought of -- as a longer-term investment. It's only been in the past half-dozen years that the get-rich-quick, no-money-down, flip-for-profit thinking has moved the masses to buy property. Creative and exotic mortgage financing techniques helped those who might not have been able to afford it to buy their dream primary, vacation or rental property.
Historically, agents would tell their buyers that they should plan to live for five to seven years in the home they buy to make money on it. So Josh's calculations prove the old rule: In the long run, buying the right house at the right price with the right financing for the right reasons can make sense financially.
What really changes things is the $8,000 refundable tax credit for first-time buyers or for those who haven't owned a home in the past three years. If you purchase and close on a first home by Dec. 1 and plan to live there as your primary residence, you can qualify for up to an $8,000 refundable tax credit.
When you factor in that gift of $8,000 from Uncle Sam, it makes the economics look even better for a longer-term purchase.
QMy fiance and I want to buy a condo for $160,000. I am 20, and he is 21. We both have credit scores around 700. I work full time at a bank. He is a full-time student and works part time. He will be graduating in one year, and we are getting married this summer. Do you think we will be able to get a mortgage with a $7,500 down payment?
AYou may not be able to qualify for a mortgage.
For the most part, your best loan option might be a Federal Housing Administration loan because of the size of the down payment. As for most other loan products, you may find it difficult to secure a loan with a low down payment.
FHA loans require just 3.5 percent in cash for a down payment, lower than conventional lenders. That means $5,600 on a $160,000 home purchase. You also have to be able to afford the payments. On a 30-year, fixed-rate mortgage at 5 percent, your monthly payments would be about $840, plus real estate taxes and insurance.
Keep in mind that recent loan guidelines may make obtaining a loan to buy a condo more expensive. In some cases, interest rates on loans for condos can be up to one-half a percentage point higher than for non-condo loans. And you may need to have a bigger cash down payment.
If you assume that your real estate taxes are $3,600, or $300 per month, and your homeowners insurance is $1,800, or $150 per month, your total monthly expenses would be about $1,290. Factor in condo or homeowners association fees. Those, along with your mortgage, real estate taxes, and homeowners insurance premiums, have to fall below 36 percent of your gross monthly income, with very few exceptions.
While 700 is a good credit score, it's not a great score. Some lenders are looking for borrowers to have at least a 720 credit score to get the best rates.
You should check your credit history by obtaining a free copy at http://www.annualfreecreditreport.com to make sure your credit history is accurate. Then try to determine where you are losing points. Do you have too much debt? Have you paid any bills late? Do you have too many credit cards with high limits? Or is it that you haven't had time to build credit histories?
It may make sense to wait until he is done with school or has at least secured a job. Waiting another year to buy would give you time to raise your credit scores and save more money. Once your fiance gets a job and the two of you get past the wedding, you may find that you have a clearer idea of where you want to live for the next five to seven years, or longer.
If you decide to pursue buying property now, speak with a mortgage lender to see what options you may have. You may be pleasantly surprised to find that you and your fiance will qualify for a nice starter home. If not, at least you'll know what you have to do to get ready to buy down the road.
My mom is 92 years old, competent and in an assisted-living facility. She has a life estate. My sister and I are the remaindermen. My mom wants to sell her home to a grandson. When this house is sold, who is entitled to the money from the sale?
Your mother has a life estate in the home but is no longer the owner of the underlying property. She would be entitled to get and keep the money from the sale of her life estate. Her grandson would be entitled to use the property while she is alive.
At your mother's death, the grandson's interest in the home would end, and you and your sister would own the home. A life estate is an interest in a property for the life of the person who receives it. It does not transfer to another person.
As people age, the value of a life estate becomes less and less. While we hope that your mother has many years to live, it is unlikely that buying a life estate would be a good move for her grandson. It would be easier if the grandson simply rented the property or looked for a different home to buy.
About one year ago, my daughter bought a mobile home with a friend. They both signed the mortgage. Just recently, her friend decided to move out. My daughter is not sure what she needs to do to remove her friend's name from this mortgage. Would a quitclaim deed take care of this?
Your daughter's friend could quitclaim her interest in the property to your daughter, but that would transfer only the ownership interest. The mortgage would still remain in both of their names until the loan is paid off or refinanced -- or until the lender agrees to remove the friend's name from the mortgage. Most lenders will not remove the name of one of the parties from a mortgage.
If the home is actually a recreational vehicle that is driven around the country, the friend would need to sign over the certificate of title to the vehicle and give her a bill of sale for her interest. But here again, the transfer won't release her friend from her obligations on the loan.
Assuming it's a traditional mobile home (also known as a manufactured home) that is placed permanently on a piece of land, your daughter should work with her friend to quitclaim the property into her name and refinance the loan so that the friend is off the mortgage and title.
If your daughter can't afford to refinance the mobile home on her own, then she will need to work with her friend to try to sell it or rent out the friend's bedroom to bring in enough cash to make the mortgage payments.
For more details, please consult with a real estate lawyer.
Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is "100 Questions Every First-Time Home Buyer Should Ask." Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through Glink's Web sites, http://www.thinkglink.com and http://www.expertrealestatetips.net.
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