Mortgages

 

Renting vs. Buying


Owning a Home

Most People...

Most people cannot buy a home without getting a mortgage. Unless you win the lottery or save for 50 years until you can pay cash for your home, getting a mortgage is a necessary step toward home ownership!

People choose to own a home for very personal reasons—they want a place to truly call their own, or a yard for their children to play in. Many argue that owning a home is an investment. However, Federal Reserve Board research shows that owning a home is typically a less lucrative investment over time than investing in the stock market. With that said, the same research shows that homeowners have a higher net worth than those who rent (and who make the same annual salary).

Pros and Cons of Buying vs. Renting

As mentioned above, personal choice plays a large part in making the decision between buying or renting. However, in the context of taking on a mortgage, there are more tangible financial aspects to consider. Continue reading for some ideas on what to keep in mind when you make your decision.

Buying

 
Pros Cons
A mortgage is considered “good” debt—a fixed, installment loan, which will look great on your credit history Other than education, a mortgage will probably be the biggest debt you take on in life
Typically, real estate value can be counted on to increase over time, making your house a relatively safe (if conservative) investment You become physically—and fiscally—responsible for repairs and upkeep
Owning a home can offer significant tax breaks. Generally, the interest on your mortage is deductable. You have less mobility; therefore, if the house proves to be more fiscal responsibility than you anticipated, it will still take some time to get out of the situation

Renting

 
Pros Cons
You have great mobility; therefore, if you find a better deal, you can pick up and move with typically just 2­-4 weeks’ notice While mortgage rates are fixed, rents are often raised every year—forcing you to choose to pay the higher rent or move
You are not responsible for any upkeep or repairs, so your home-related costs are fixed You will “lose” the rent money you pay every month, getting no long-lasting investment value from it
You may be able to afford more space and amenities if you are renting than you could if you were buying You usually cannot make upgrades to your abode—or wouldn’t be reimbursed for them—that would help save money in the long-term (better windows and insulation, newer furnace, etc.)

Being in Debt

If you want a house and need a mortgage, you’d better get used to debt. In 2006, the outstanding American mortgage debt stands at $9.5 trillion. In 2003, the Mortgage Bankers Association reported that the average mortgage loan hovered around $202,000 and the average outstanding mortgage balance was nearly $91,000.

The typical mortgage loan lasts 30 years, although 15-year and 40-year fixed mortgages are also available. Talk to your financial advisor and assess your tolerance for debt and financial risk, as well as your preparedness for other big financial events (having children, educating them, retirement). Kiplinger (publisher of Kiplinger’s Personal Finance, which has been published continuously since 1947), offers several charts to figure out your net worth, down payment, and affordable monthly budget.

Read on to understand mortgage foreclosure.

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