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Buying a Home vs Renting - Guide to Cheap Housing

is it better to rent or buy
Buying a home vs renting is something every family needs to think clearly about before jumping into anything, even in this cheap housing market. Learn about cheap housing with this guide to living cheap.

It used to be a no-brainer: save up money for a down payment and buy into the American Dream. But times have changed and what once used to be considered an asset and the best investment you could make in your family, has turned into a mountain of foreclosures and liabilities.

So, which is better? Buying or renting with cheap house rentals? The truth is, there is not one set answer. This will vary from person to person. Here are some common home ownership myths on buying a home vs renting and ways that you can determine what's best for your family.

Buying a Home vs Renting:
Home Ownership is an Asset

This concept has been drilled into our heads for years. Buy a home. It's the biggest asset you can ever have. But if you are not planning to stay in your home for more than five years, you'll be lucky to break even.

The first five years you are in your home, your monthly mortgage payments are primarily paying interest. Approximately 80% of your payment during those first five years goes towards interest.

Traditionally, homeowners would use the extra money they made when selling their homes to make the down payment on their next home. But now that housing prices have lowered, due to the start of the correction of evening out the price increase fluke we have been experiencing over the past decade, this is simply not possible.

Years 0-5 6-10 11-15 16-20 21-25 26-30
Approx % to Interest 80% 70% 60% 50% 35% 10%

If you are planning to stay in your home 5 years or longer (10 or longer is better) there is hope that the housing market will eventually get better. But less than that? You could end up upside down.

Buying a home vs renting. It is cheaper and easier to stay in cheap house rentals if you may move due to job relocation or career change, if you are not sure if you like the area you live in, or if you may need to move to a bigger home as your family grows. Sock your extra money into your savings account and be better prepared to buy a home with the time is right.

A home is not an investment. It's not a savings account. (How could it be, when the only way you could access your savings would be to sell and move?) It's shelter. If you haven't read Robert Kiyosaki's explanation of assets vs liabilities, I recommend Rich Dad, Poor Dad. He sums it up better than I ever could.

Buying a Home vs Renting: It's Cheaper to Buy

You've seen the ads saying that you could own a home for less than the price of your rent. But is it true? After all, the numbers look good, and it is a down market, after all. It looks pretty easy to score a mortgage for less than $1,000/month.

But here's the thing. There are many hidden costs when it comes to buying a home. First, that $1,000 a month? That's calculated after a down payment as much as 20%. Plus, it does not factor in fees such as property taxes or mandatory insurance, which could raise the price by almost 50%.

Then there are maintenance fees and repairs that will happen. You could be talking twice the monthly payment, all things considered.

Now, sure, renters of cheap house rentals pay many of those fees too, as landlords will pad the rental price to cover them. But there are no surprises in renting; it's one payment per month regardless of what needs to be repaired or replaced. And if your landlord raises your rent too high? Renters have the option to move. With homeowners, that option is much more difficult.

Plus, let's talk about fees to get started. A renter pays first and last month's rent, plus a security deposit. The rent goes towards rent, and they usually get the security deposit back in the end.

But a homeowner? Closing costs can be 5% of the loan amount, and add another 6% for the realtor's commission, for a whopping 11% in fees! That means your house would have to increase in value 11% just to break even.

Here's a home buying calculator that will help you determine whether it is better to rent or buy in your particular situation.

Buying a Home vs Renting: Home Owners Get Tax Benefits

Another common reason most people cite as a benefit to buying a home vs renting is the tax savings. This is a myth. Yes, if you have a mortgage, you are able to deduct your interest at tax time, but there are a few caveats.

First, this is a deduction, not a credit. What's the difference? Well, a credit reduces the amount of taxes owed, while a deduction reduces the amount of income your taxes are calculated from. Meaning, for every $1 in mortgage interest you spend, you may save 30 cents off your taxes. Still, it helps.

Also, you are only able to receive this cheap housing deduction if you itemize your taxes. You see, the IRS allows everyone -home owners and renters alike- to take what is called a "standard" deduction. It's only if your deductions exceed this standard deduction that they can count. Most people take the standard deduction, as in many situations it is better.

And let's not forget property taxes! When factored in to the big picture, you can see that homeowners really have no tax advantage at all.

We live in a different world now. Homeownership is not all it was cracked up to be, is no longer cheap housing, and is not right in every situation. But that's not to say that buying a home vs renting is not right in your situation. If you have a significant down payment, find the house of your dreams at the right price and plan to live there for at least the next decade, then homeownership might be the perfect solution to your shelter needs. If not, there are other alternatives.

What have you decided on the issue of buying a home vs renting? Are you a homeowner? Do you have any regrets? Perhaps you are a renter looking to buy a home. Weigh in with your thoughts below.

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