House or rent? Your opinion

phyllis_philodendronMay 5, 2003

We have friends who are getting married this summer. They are dead set on getting a house, even though neither of them are big savers. (She brags about how much she spends in groceries alone, even though right now she lives with her parents, and DH has known him since grade school and is quite familiar with his spending). Whenever they bring this up, we suggest renting in order to save money, since the first few years of marriage can be tough and starting out in debt can be even worse. Apparently he asks my husband for advice, so he is asking for his opinion (not that we care either way what they do). An interesting parallel to all this is that the groom's mother is kind of pushing them to buy a house (and not a "starter") based on her own experience, which she admits has put her in debt for most of her life (she is now divorced, son is living at home paying bills with her, and now she is faced with living/paying bills alone).

Anyway, what do you think? Is it better to rent first or buy?

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trekaren

In the Atlanta area, rent has gotten so high that it sometimes is higher than a mortgage payment. There is no way that I could rent a small place for the amount I pay in a mortgage. This may differ in other cities.

I believe they will have to learn good financial practices whether they rent or own. They should really get disciplined there very quickly. I highly recommend living life free of all debt with the ecxeption of house payments/rent and small car loans only when a car has been driven til the wheels fall off.

My best advice is, if they have enough for 10% down, then go for it. Otherwise wait. I know that financial institutions have tempting offers that will waive the necessity for a big down payment. But then you own no equity in the home and you owe boatloads of interest.

If their bad financial habits have them in a situation where the only way they can get a loan is thru some of these creative ways lenders have going now, and not a traditional fixed, don't do it. Better to get a fixed, while rates are low, then end up on a balloon or some other non-fixed loan.

    Bookmark   May 5, 2003 at 2:35PM
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talley_sue_nyc

In NYC, the monthly load of renting is as high as owning (sometimes higher). It's saving up the down payment that's hard. Sometimes when people get married, they get enough cash in presents to help with this; sometimes they don't.

I had a friend whose dad was against her buying an apartment because he thought she should save money by renting. Meanwhile, she was paying as much in rent as I pay in mortgage and maintenance, and my co-op was four times the size of her studio! And I can sell it. She opted instead to move out of NYC (I'd advised her to consider buying, if and only if she knew she wanted to stay in NYC for the next 7 years).

In some locales renting IS cheaper (though you have to be sure you're not renting luxury, and you can do well if you buy inexpensive).

The best advice would be for them to talk to a financial adviser familiar w/ their own area.

And, of course, to get a handle on their spending habits (and get used to their spending habits) somewhere that it won't cost them if they mess up.

Maybe setting a goal of buying a house will get them to start saving money!

    Bookmark   May 5, 2003 at 8:17PM
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phyllis_philodendron

In the area they're looking, I would say renting is definitely cheaper than buying. She wants to stay closer to keep her job, although I'm not sure this will work out. Even if they looked, say, 10 or 15 miles north of where they're looking right now, the rent/housing would be much cheaper than where they're looking.

Thanks for the responses.

    Bookmark   May 5, 2003 at 9:26PM
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jamie_mt

Interesting - here, renting is absolutely more expensive than buying in any city...I've never heard of it the other way around.

In any case, I'd say if they are going to be staying in the area, buying would be a smarter choice (though I would recommend a starter home if possible). First time home-buyer's programs are great, wonderful interest (that's what I got - low down payment and prime interest at the time), and they will be building equity, slowly but surely. And it will be *their* house, not a landlords. Of course if they are considering moving somewhere else within 8-10 yrs, then I'd say renting might be a better option, just because it takes awhile to build equity in a house.

I've never rented - moved straight from my parents' house into my own, and I've never, ever regretted it, even though I will be selling early and won't get too much out of this house (though more than I would have renting). All the stories I hear from friends who rent and have to deal with landlords, houses selling underneath them, and all the restrictions that come with renting...for stability and a sense of ownership, I'd highly recommend buying (when I get married this year or next, we'll be buying a bigger house right away as well).

That's just my (admittedly biased) opinion, of course. :-)

    Bookmark   May 6, 2003 at 12:43PM
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adellabedella_usa

Dh and rented for the 1st 4 years we were married and I don't regret it. Renting made us a lot more mobile and kept us from getting stuck in a place (jobs, location, etc.) that I/we really didn't want long term. By renting, dh was able to take his his time to find a better job away from where we were. In doing so, I was able to quit my job and we are now buying our own house. I know this doesn't work for everyone, but if we had bought our house and then moved we possibly could have lost more money on the sale of the house. Not everyone that buys a house and then sells it makes a profit or even breaks even. It was nice to have someone responsible for the repairs on the rental; whereas, with owning, if it breaks you fix it or pay to have it fixed. Renting also allowed dh ample time to look around and see what we really wanted in a house before we actually started looking around to buy.

    Bookmark   May 6, 2003 at 4:47PM
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lilypad22

I never thought renting was cheaper. Renting is giving away your money. Buying a home is investing. Houses are selling slowly so the prices are coming down and the interest rates are good. Not everywhere I know.

    Bookmark   May 6, 2003 at 11:17PM
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windchime

Buying is the way to go. There are just a couple of exceptions. If they are not going to stay for at least five years, they will not break even with all the closing costs of buying and then selling, so, in that case, they should not buy. If they have really bad credit and can only get a sub-prime loan, then I recommend renting until they can improve their credit.

Otherwise, buying is the way to go, even if renting SEEMS cheaper on a month to month basis. The reason I say "seems" cheaper is because they actually cost the same many times. Property taxes and interest on the mortgage are 100% tax deductable so long as they are not high earners and required to pay the minimum tax. At the beginning of a mortgage, virtually the entire monthly payment is going towards interest so the new homeowner realizes a large deduction. To find out how much a mortgage payment is really costing per month versus rent, first figure out the after tax interest rate. The formula is: interest rate x (1-tax bracket.) Example for someone in the 15% tax bracket with a 6.25% interest rate: 6.25 x (1-0.15) = 6.25 x 0.85 = 5.31%. Now, to compare owning to renting, head over to the mortgage calculator on Bankrate.com and plug in 5.31% as the interest rate and see how much the monthly payments would be. Of course, these are not the real monthly payments, but how much the payments would actually cost after receiving the tax benefit of homeownership. This comparison does not take into account the property taxes which have to be added to the monthly payment. But, once again, those taxes are tax deductable, so they are not costing as much annually as they appear to cost monthly. I'm sure that there is a way to figure out the true cost, but I just can't think right now. :)

Another benefit to buying if someone has poor saving habits is that many times, for these people, the obstacle is saving up the down payment. If they think that they will receive enough $$$ in wedding gifts to use as a down payment, then I think that they should spend it on a down payment before they decide that they "need" a new car, or a big screen TV, or some other non-essential that many poor savers seem to always require. Based on my experience with poor saving family and friends, I don't think that they will have too much trouble making the payments. It has been my experience, that when something truely essential comes up, they somehow find the money to pay for it, even though, previously, they were living paycheck to paycheck, and insist that they must live this way. The reality is, that they have more discretionary income than they realize, and can certainly reallocate it, if need be. My aunt recently bought her first house. The only reason that she was able to do this is because she was given the down payment by her son. The mortgage payment is MUCH higher than her rent payment, yet, she is managing just fine!

Finally, I advocate buying sooner than later, even if it means only putting down 3%. Real estate is constantly appreciating. The longer they wait, the more the same house is going to cost. I mentioned this is another thread, but, I'll reitterate. The 30 year mortgage is the best deal going IF you actually keep your mortgage for 30 years (which most people don't do.) Think about it, your mortgage payment remains the same for 30 years. Yet, over the course of those 30 years, the dollar has depreciated, and you've received raises to adjust for inflation. Perhaps, 30 years ago, the average mortgage payment was $175/month (I just made up that figure, but it sounds about right to me.) As the years go by, that $175 seems like less and less of a burden. Today you can't even buy a car for $175/month. Yet, the house that originally cost $175/month has appreciated tremendously in value. I can only imagine what my aunt's financial situation would be if she had had a down payment 30 years ago. I would love to see her retire w/out a mortgage, but that is just not going to happen. :( Of couse, many people will refinance in order to get equity out of their home. We can only hope that they use this money to make improvements to the real property, but we know that many don't. But I still don't think that that's a reason to advocate renting over buying.

Here is a link that might be useful: Bankrate.com

    Bookmark   May 7, 2003 at 1:06PM
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phyllis_philodendron

Interesting responses. Somewhere I read from a financial guru on MSNBC.com that renting actually wasn't throwing your money away; but I couldn't tell you what the rationale was for it. I rented twice before getting married and that was the only way for me - I agree that it made me more mobile and I knew I wasn't going to stay in the area long. When I say renting is cheaper, I mean for an apartment, versus a mortgage per month on a house. Although, when I lived in eastern PA, at the time my rent was the same amount as that of an entire house's rent that my brother (in Ohio) was renting to people. The midwest is typically cheaper that way, or somewhat less, than elsewhere, I've noticed.

Our friend's mother is advising him, as I said, not to buy "just a starter," but anticipate that they'll be there for a while. I have no idea what they're looking at, but I know from the mother's experience that while she had a beautiful house with memories of raising her family, she now has an empty, beautiful and expensive house to look forward to, and virtually NO savings. So not always does making house payments make you into a disciplined saver. This is one thing that frustrates us about them: the mother and son have similar spending/saving habits and don't see until it's too late that they'll never be able to retire (as the mother is finding out right now). But, that's the way they choose to live their lives!

    Bookmark   May 7, 2003 at 6:02PM
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CindyBelleZ6NJ

This has been interesting. I bought a condo once, after renting for a long time, because it would cost about the same as rent, etc. Who knew the market would crash, I would move to another coast, rent the thing at a loss for 10 years hoping to recoup, and finally sell at a tremendous loss? In my area, my mortgage and taxes is the same, or slightly less than renting a nice one bedroom apt. or ok two bedroom apt. However, as Suze Orman always says, make sure you put earmark money every month for mantainence-because the unexpected happens, and the routine is necessary. I own a house now, and I have been luckier this time with appreciation; I do have some philosophical problems with the tax laws/homelessness problem, etc. However, usually for a two income couple, the mortgage interest deduction is a tremendous boost at tax time, and should be considered. I always remember the words of a friend, you can't eat a house, in determining what is affordable. It's a good thing I did not get the house/space of my dreams, which was a huge stretch, because as the economy downturned, the industry I work in took a tremendous hit, and there were three paycuts. Also, because this is a family business, I held up to 18 paychecks to help the family with cashflow problems. I would not have been able to do that if I had bought the dream home. IT would have been the nightmare home because I would have lost it. Now, don't go thinking I live in a hovel, I don't. It's a small house with wood floors, fireplace, crown molding, French doors, character galore, and I worked like a dog to bring it up to snuff. Without fail people come in and say, it's a big small house, meaning for the size of the house from the outside, the rooms are spacious; and then everyone gasps at the original sconces and the beautiful plaster walls, etc. Your friends might not want the upkeep a house requires; they might want to rent to make sure they like an area; or maybe they are deep in debt you don't know about. Still, if I could turn back the clock, I would have bought a house sooner and taken the hit on the condo sooner. Hindsight being 20/20 and all.

    Bookmark   May 7, 2003 at 7:52PM
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windchime

Sounds like your friend's mom cashed out the equity in her home. That's something that renters can't do, of course. But I still don't think it's a reason not to buy. And I agree, owning a home does not magically turn someone into a saver. But, like I said, people who are living paycheck to paycheck somehow manage to come up with the extra money that they need for the more expensive living arrangements, which only proves that they don't really have to live paycheck to paycheck as they claim. Of course, I'm not talking about the small minority of truely working poor, minimum wage earners, who just make ends meet, and cannot afford cable TV, a personal computer, a bottle of nail polish etc.

Cindy, if you don't mind me asking, what do you mean by tax laws/homelessness? Do you mean that it's not fair that hmeowners get a tax break while renters, who theoretically need it more, do not? I think that the tax break is set up to encourage homeownership, which is supposedly good for the economy, good for communities, etc. The tax break supposedly allows homeownership to be more affordable. Did you know that in NJ renters get a homestead rebate just as homeowners do? The homestead rebate is a kickback from the state for property taxes. Landlords can't take it on their income property because it's not their primary residence, but their tenants can. Now, if you're talking about homeless people, I think that we can do more for them, particularly the children. BTW, I too have held DH's paychecks for several weeks b/c of cash flow issues. Fortunately for me, I've never had to hold more than 8 or 9 weeks, and I haven't done it in a long time. I took a look at your page and I see that we have a lot in common! We are sorta neighbors (I live in morris county.) We each got a dog from the same place (petfinder.com.) And our yards are pretty much in the same condition. LOL Unfortunately, I don't see myself getting much done outside this year b/c I have a new baby. :)

    Bookmark   May 8, 2003 at 2:50PM
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phyllis_philodendron

I see your point, windchime. I just look around at her house (stuffed with nice furniture and things) and wonder how she's going to do it all by herself when he moves out. She openly admits that her children will basically have to support her. I'm sort of having trouble with this, because we all know it's because she never had good saving habits. Her house is full of Lenox everything and only the best, blah blah blah and yet her children will have to support her. I guess having material things meant more to her than long term financial security. But that's another topic entirely!

    Bookmark   May 8, 2003 at 9:04PM
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Gina_W

Phyllis, I have an old dog-eared copy of Personal Finances for Dummies that addresses this dilemma very simply. I think there was a formula in there to give you an idea whether renting or buying is better depending on several variables.

I do agree that the interest rates these days make it very attractive to buy instead of rent. But of course it depends on your area and the people involved.

    Bookmark   May 9, 2003 at 5:20PM
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CindyBelleZ6NJ

Hi windchime, maybe it's not the tax laws I should be upset about, it just seems like with housing in North Jersey appreciating at such a high rate, yet with so many homeless-I don't know, I'd be happy to take less appreciation if there was a way to somehow get more money to build affordable housing, both rental and other for lower income people. Yeah, I've done the Habitat thing. And I did make, and continue to make tremendous sacrifices to own this home, all have been on my own. But sometimes that isn't enough, and I think everyone is entitled to a safe and decent place to live in a country as rich as this one. So sometimes I just get frustrated. What if 1% of that tax break went into a fund or something? By the way, congratulations on your new baby, much joy in store!

    Bookmark   May 11, 2003 at 7:38PM
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