BUYING -
Tips
& Tools
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There are three
main factors to consider before setting off to
find your new home:
What
Can You Afford?
When hunting
for a new home knowing up-front what you can
afford will help you save time and quite possibly
disappointment later on. It's important to be
realistic when you're thinking about a down payment
and setting a price range. You don't want to be
saddled with something you can't afford. At this
stage, it's a good idea to talk things over with
a real estate sales professional.
HOW
MUCH CAN YOU AFFORD
Stage of
Life When looking at
a home, it is important to consider the number
of people it must accommodate and the things they
like to do. A family with children, pets and
hobbies such as gardening and restoring antique
furniture obviously has housing needs vastly different
from a newly-retired couple with a passion for
travel.
Begin by listing
your needs:
- living requirements
(i.e. how many bedrooms);
- family size;
- what you're bringing with you from your old house;
- how close to schools, shopping and other services;
Even though your individual circumstances will ultimately govern your housing
choices. It is possible to generalize and draw some conclusions about what
you need now and what you will probably need in the future.
Generally speaking
there are three stages of development for a family
or a group of people living together.
The first stage
People under 35 years of age have rapidly changing needs. The size of their
families usually increases requiring larger accommodations. Income earners
often switch jobs at this stage and sometimes this mean a move to another
city. Single people also tend to move around at this stage. Most home owners
buy their first house at this stage.
The second
stage
Between 35 and 50 years of age most families and individuals become more stable.
Income earners usually have more secure jobs and the family size tends to remain
constant. Families and individuals at this stage tend to stay put, given the
choice.
The third stage
Once pass 50, peoples lives tend to become even more fixed. Family income-earners
rarely change jobs and their children begin to set out on their own. Third
stage families tend to not need as much space. Yet, they are reluctant to
move because they are comfortable where they are. If they do move, it will
be for personal reasons such as infirmities, which make home maintenance too
hard, or to accommodate a retirement lifestyle.
Whether
to Buy or Rent
Here
are some of the main factors that should be considered
before deciding whether to buy or rent:
Location
You really want to think about where you plan on living over the next five,
ten or even thirty years. If you plan on doing a lot of traveling over the
next couple of years (or relocating), then buying becomes a less attractive
option.
Employment
Your employment definitely plays a big role in your final decision. If you work
in a field that requires relocation every two years, then you may be better
off renting. Working in a stable field will allow you to purchase your home.
Finances
Your financial situation is a major factor in buying a home. Can you afford
the extra monthly payments that a mortgage usually requires? Do you have the
available cash necessary to make the down payment? What about other expenses?
Are you planning on buying or leasing a car?
Depending
on your lifestyle, your cash flow situation at
the end of the month plays a major role in your
decision. Every person's situation is different,
so people should take the time to look at their
own situation. Other important issues include:
which option offers more value (expense vs. investment)?
Which option offers more stability?
Sense
of pride
I know this is a "feel good" reason
-- but it's true, at least for most people. You'll
have a greater sense of accomplishment when you
own a home.
Steady
payments
As a renter, you run the risk of your lease cost going up. With a fixed rate
loan, you can set your payment and keep it there for the duration of the term.
Better
credit opportunity
It will be a lot easier to apply for other loans
if you already own a home. You can build equity
over time and borrow against that equity if you
choose
to. Credit card companies typically favor homeowners, which is why you've probably
noticed that one of the early questions in credit card applications is, "Do
you rent or own a home?"
Freedom
You can do whatever you want to your home. You don't need the landlord's approval
every time you want to paint or redecorate.
Some
other advantages of home ownership include:
Homeowners can benefit from tax-free profits
on the sale of their home (primary residence).
Buying a home can be a way of saving for retirement
by building
equity. Buying a home is a rather secure investment. The prices usually don't
go down. Quite the contrary, you can expect prices to go up over the long run
-- unless you bought in an extremely hot market, a place next to a junkyard,
railroad or the local nuclear power plant. You don't have to worry about following
the landlord's "special" rules, or being kicked out for breaking them.
Note, however, that some places (condos) do have rules established by the association. So
who should rent?
Here
are the main reasons why you should consider renting
your place, rather than making that big investment
and commitment towards purchasing your home:
Small
initial payment
At maximum, you make a security deposit for the first and last months' rent.
If you buy a home, you need to put a 10-20% down payment, which is equal to
several years' rent. You can also use the down payment to invest in other projects.
Liquid
cash
There are other ways to earn interest. With real estate, sometimes you can make
more money, and other times you'll make less. Imagine if you had taken the down
payment back in 1990 and invested in the DJIA [Dow Jones Industrial Average]?
You would have had a return of 347%. The NASDAQ would have given you a return
of 931%.
Higher
flexibility
When you rent, you can move whenever you want.
You don't have to wait for your house to sell.
If you're relocating, at worst you'll lose your
security deposit.
Less
risk
You don't have to worry about natural disasters (earthquakes, floods, storms,
and so on) that might inflict serious damage to your home. As a renter, you
simply receive insurance for your personal property.
Less
responsibility
You don't have to worry about painting the walls, keeping up with the standards
of city codes.
Fixed
costs
You pay your rent, while some utilities may
be included at a flat rate. You don't have to
worry about unexpected maintenance costs or
property taxes
going up.
Financial
insecurity
Are you in danger of losing your job? If you
are, how long will it take for you to get another
one?
Closing
thoughts
Anyone
who is merely looking at the bottom line should
run the numbers.
You
can either rent or buy a home. Is there a theoretical
framework whereby one can analyze this buy versus
rent decision? The answer is yes. It is a very
simple cash-flow analysis of the two alternatives.
You
list all the cash flows required under home ownership,
as well as all the cash flows required under renting,
and compare the two. I recommend that you click
here to try out a Rent
vs. Buy Calculator,which
may assist you in making that final decision.
Simply fill in
the numbers, click on "submit" and
then read the recommended strategy.
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