Rent vs Buy a Home

HHHunt understands that many make a decision to buy a house partially because of lifestyle issues – having a yard for a pet or more space to spread out are important quality of life considerations. However, homeownership solely for the sake of building personal wealth is not necessarily a sound decision.

Below are several myths about homeownership and the contrasting reality.

Myth #1 - Purchasing a home will provide a huge tax break.

The Reality – Tax advantages for many homeowners may not exist and in some cases may be nominal. Consider the following:

• The standard deduction in 2010 for a married couple filing jointly is $11,400, for a single individual is $5,700 and for the head of household it is $8,400. As a homeowner, if your mortgage interest and other itemized deductions do not add up to the standard deduction amount, you will experience no tax advantage. As a renter you are still eligible to receive the standard deduction and would not have to incur expenses such as mortgage interest and property taxes

• A tax deduction is used to reduce your taxable income but only a portion of the deduction is realized as true savings – typically 25% to 28% based on your tax bracket. For example consider a married couple with $11,000 total deductions. The only advantage you would have over a renter who paid zero in interest and property taxes is an extra $300 in deductions. If you’re in the 25% tax bracket, that $300 extra in deductible interest is worth just $75.

• Perceived tax advantages become negligible once you consider all of the additional expenses homeowners incur each year

  • Private Mortgage Insurance (PMI) – When you purchase a mortgage you are required to pay PMI to insure the loan for the lender, and this expense typically ranges between $150 - $200. The law allows for PMI to be charged until the borrower has paid off at least 20% of the house. The law also allows lenders to require this insurance until 50% equity has been established by high-risk borrowers that include those that have marginal credit, higher debt to earning ratios, and those who provide less proof of income during the approval process.

  • Maintenance Expenses – A major advantage of renting includes no expenses. To maintain the high standard of quality at our communities, HHHUNT spends on average approximately $900 per apartment home each year ¹. As a homeowner you can expect to spend at least that much on an annual basis for necessary maintenance and repairs.

  • Property taxes, homeowner’s association dues, landscaping costs, gym memberships, pool memberships, upfront costs for home furnishings and appliances, and higher utility costs are additional expenses homeowners experience each year that renters will be able to avoid. These additional costs totaled will quickly surpass the amount of cash you receive from your “tax break.”

Myth #2 - Paying rent is throwing away money especially when a mortgage is less expensive.

The Reality – There are great benefits to home ownership for most people, however there are certain situations when renting is financially beneficial. Additionally, many online “Rent vs. Buy” calculators that promote home ownership and show the financial advantages of buying versus renting are flawed and misleading. Consider the following:

• According to a report generated by Mark Obrinksky, NMHC Chief Economist, on January 25, 2005, “Calculating the full cost of ownership is complicated, and online calculators that sacrifice accuracy for ease-of-use mislead consumers and perpetuate the myths about homeownership.”²

• Mark Obrinsky also found that calculators mistakenly assume everyone will receive a tax incentive from their home purchase. In fact, only half of all owners realize a tax advantage based upon itemizing their deductions ³. Many calculators also contain flaws that do not account for maintenance costs, insurance and taxes, and other homeownership costs – See The Reality of Myth #1.

• Advantages of homeownership may be realized by those who:

  1. Plan to stay put at least three years,
  2. Are prepared to deal with noisy neighbors and maintenance issues on their own,
  3. Have extra savings, and
  4. Understand the importance of managing their money – monitoring their expenses and income to ensure positive personal cash flow.⁴
  

Myth #3 - No more rent increases!

The Reality – It is true with a fixed mortgage rate your actual mortgage payment itself will stay constant, but you may experience increases in property taxes and insurance. While rent increases do occur, you may find they are less than the other rising costs of home ownership. Consider the following statistics:

• Since 1981 property taxes have increased 55% (in 2004 dollars) according to the US Census Bureau.

• Homeowners insurance rose 9.1% in 2004 and 4.8% in 2005 according to a study by the National Association of Insurance.

Myth #4 - Buying a home is a great investment.

The Reality – “Homeownership may not be the best place to get a strong return, especially if you look at the average home price appreciation of other assets. Putting all of your money in a house is like putting all your wealth in a single stock in the stock market. It’s a risky financial strategy.” Consider this:

• Over the 1990’s the Standard and Poor’s 500 gained 338%. During the same period the median price of a home rose only 44%.⁷

• When you buy or sell a home with the assistance of an agent you immediately lose out and gain a limited return on your investment. Standard commission fees for a licensed real estate agent range between 2.4% and 3% per agent. Considering the national median home price for all housing types in the 4th quarter of 2007 was $206,200 the initial expense just for real estate commissions could be as high as $12,372 when both a seller’s and buyer’s agent are involved.

• With the recent challenges in the housing market many areas have limited or negative growth in the value of homes, especially existing homes.

Myth #5 - When the interest rates are low, buying is the smartest decision

The Reality – The housing market operates similarly to other industries in that supply and demand control the price.

• In some markets you may find the cost of housing begin to rise when interest rates fall. The result could be inflated housing costs during the period characterized as a “Sellers Market.” Once the interest rates stabilize, the market could easily shift to a “Buyers Market” and some may find they purchased a home at an inflated price just to lock in an interest rate.⁹

• Additionally, to take advantage of the lowest interest rates you typically must secure an Adjusted Rate Mortgage (ARM) that requires you to refinance every 3-5 years to avoid high rate resets. Each time you refinance you will also have to pay for home appraisal and inspection fees, and loan origination fees which may exceed $2000-$3000.

There are many questions that you should ask yourself prior to making the decision to buy.

✓ How much space do I need?
✓ Do I need a garage?
✓ Do I need a yard for pets or children?
✓ Do I like to garden?
✓ Do I want recreational facilities such as a pool, tennis courts, etc…?
✓ Do I like to fix things?
✓ Do I plan to move or accept new employment soon?
✓ How close to shopping, retail and restaurants do I want to be?
✓ How far from work am I willing to be?
✓ Do I live paycheck to paycheck?

For those who desire a yard, a garden or a lot of space (over 1500 square feet) a house may be a better choice.

However, since HHHunt can pool the resources of the organization and purchase prime real estate, those who value convenience to shopping and restaurants, a short commute to work or superior school districts may be better off renting a home at HHHunt.

Those who value flexibility in their housing and employment options and those who enjoy access recreational facilities such as fitness facilities, pools, tennis courts and social events may also be better suited to renting a home.

APARTMENT LIVING IS A GREAT CHOICE FOR:

• Empty nesters.
• Anyone starting a new career
• People who like to travel for fun
• Professionals who travel often for work
• Consultants who are transferred frequently
• Busy people with no time for maintenance or yard work
• People who want to spend their free time with family and friends

HHHunt employs a skilled staff to deal with any and all issues that may arise. From the Custodial Team who wipes down doors and picks up litter to Service Team Members who are plumbers, electricians, HVAC technicians and carpenters rolled into one, every maintenance request is handled promptly and professionally. This translates into a clean, well-maintained home with virtually no effort on your part and no additional cost.

The time savings an HHHunt resident realizes by having no maintenance responsibilities is compounded by the flexibility offered by apartment living.

As the employment market rebounds, there are many job new opportunities being created. HHHunt residents are positioned so that they may take advantage of new employment opportunities without having to worry about the time and expense of selling a house.

If you have made the decision that homeownership is for you based upon your unique situation and your lifestyle, HHHunt recommends that you:

1. If you have never purchased a home, attend a home-buying or mortgage seminar. These sessions are offered free by many mortgage brokers and realtors to educate you about the process.

2. Find out your credit rating. Is it good enough to qualify for favorable terms for a mortgage?

3. Review your financial position.

(a) Do you have a down payment? This can be between 3% and 20% of the anticipated loan amount.
(b) Do you have enough available cash to pay the closing costs? This is typically $3000-$5000 for a new loan.
(c) What is the maximum payment that you can afford? This figure should include the mortgage, insurance and taxes as well as Homeowner or Condo Association dues, at minimum.
(d) Are you prepared for higher utility costs? Average utility bills in a house are sometimes double what you would pay in an apartment.
(e) Do you have enough extra funds available to furnish and decorate your new home or will you have to go into debt to afford these items? If so, incorporate the additional payments into your monthly budget.


4. Pre-qualify or get pre-approved for a mortgage before beginning the search for your new home. Often, sellers will be more willing to accept the offer of someone who has secured financing rather than one who has not.

5. Narrow down the area, the type of house that you want and make a wish list. Do you want a two-story or ranch house, a condo or a house with a yard? Is a garage important? A fireplace?

6. Find a realtor in your area that you trust. Shop around and solicit referrals from friends and family.

7. Be patient. The search for a home can be stressful and there are many choices in the market. Make sure that the home you buy is the right one because you will be making a long-term commitment.

8. Once you have found a home to purchase, find a reputable home inspector. This inspection is to find any repairs, structural issues and/or safety problems that may exist. In addition, a termite inspection and, in some areas, a radon inspection should be performed.

Be sure that the inspection is comprehensive and don’t be afraid to ask for repairs from the seller, this is the only chance that you will have! Once you close on the home, the expense of any repairs will be all yours.

Purchasing a new home is a long-term commitment and is not without risk, both financial and personal.

Most responsible lenders and realtors will advise homebuyers of the risks of homeownership as a means of accumulating wealth and caution consumers about being prepared for homeownership.

For more information about the risks associated with homeownership, visit:

http://www.freddiemac.com/corporate/buyown/
english/preparing/right_for_you/risks.html

or

http://www.gmacfs.com/SmartEdge/en/mortgage/
homeowner/risk_home.html

HHHunt strives to ensure that before someone makes a decision to purchase a home they are well-versed in the terminology. As a resource for those who desire to purchase a home, please find below the most common mortgage terms with simple definitions.

Acceleration clause
A provision in a mortgage that gives the lender the right to demand payment of the entire principal balance if a monthly payment is missed.

Adjustable-rate mortgage (ARM)
A mortgage that permits the lender to adjust the mortgage's interest rate periodically on the basis of changes in a specified index. Interest rates may move up or down, as market conditions change.

Amenity
A feature of real property that enhances its attractiveness and increases the occupant’s or user’s satisfaction although the feature is not essential to the property’s use. Natural amenities include a pleasant or desirable location near water, scenic views of the surrounding area, etc. Human-made amenities include swimming pools, tennis courts, community buildings and other recreational facilities.

Amortization
The gradual repayment of a mortgage loan by installments.

Amortization schedule
A timetable for payment of a mortgage loan. An amortization schedule shows the amount of each payment applied to interest and principal and shows the remaining balance after each payment is made.

Amortization term
The amount of time required to amortize the mortgage loan. The amortization term is expressed as a number of months. For example, for a 30-year fixed-rate mortgage, the amortization term is 360 months.

Annual percentage rate (APR)
The cost of a mortgage stated as a yearly rate; includes such items as interest, mortgage insurance and loan origination fee (points).

Appraisal
A written analysis of the estimated value of a property prepared by a qualified appraiser. Contrast with home inspection.

Appreciation
An increase in the value of a property due to changes in market conditions or other causes. The opposite of depreciation.

Assessed value
The valuation placed on property by a public tax assessor for purposes of taxation.

Binder
A preliminary agreement, secured by the payment of an earnest money deposit, under which a buyer offers to purchase real estate.

Breach
A violation of any legal obligation.

Cap
A provision of an adjustable-rate mortgage (ARM) that limits how much the interest rate or mortgage payments may increase or decrease. See lifetime payment cap, lifetime rate cap, periodic payment cap and periodic rate cap.

Capital improvement
Any structure or component erected as a permanent improvement to real property that adds to its value and useful life.

Clear title
A title that is free of liens or legal questions as to ownership of the property.

Closing
A meeting at which a sale of a property is finalized by the buyer signing the mortgage documents and paying closing costs. Also called "settlement." At this meeting, ownership of the property is transferred from the seller to the buyer.

Closing cost item
A fee or amount that a home buyer must pay at closing for a single service, tax, or product. Closing costs are made up of individual closing cost items such as origination fees and attorney's fees. Many closing cost items are included as numbered items on the HUD-1 statement.

Closing costs
Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Closing costs normally include an origination fee, an attorney's fee, taxes, an amount placed in escrow and charges for obtaining title insurance and a survey. Closing costs percentage will vary according to the area of the country; lenders or REALTORS® often provide estimates of closing costs to prospective homebuyers.

Closing statement
See HUD-1 statement.

Commission
The fee charged by a broker or agent for negotiating a real estate or loan transaction. A commission is generally a percentage of the price of the property or loan.

Common area assessments
Levies against individual unit owners in a condominium or planned unit development (PUD) project for additional capital to defray homeowners' association costs and expenses and to repair, replace, maintain, improve or operate the common areas of the project.

Common areas
Those portions of a building, land and amenities owned (or managed) by a planned unit development (PUD) or condominium project's homeowners' association (or a cooperative project's cooperative corporation) that are used by all of the unit owners, who share in the common expenses of their operation and maintenance. Common areas include swimming pools, tennis courts and other recreational facilities, as well as common corridors of buildings, parking areas, means of ingress and egress, etc.

Comparables An abbreviation for "comparable properties"; used for comparative purposes in the appraisal process. Comparables are properties like the property under consideration; they have reasonably the same size, location and amenities and have recently been sold. Comparables help the appraiser determine the approximate fair market value of the subject property.

Condominium
A real estate project in which each unit owner has title to a unit in a building, an undivided interest in the common areas of the project and sometimes the exclusive use of certain limited common areas.

Contingency
A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector.

Contract
An oral or written agreement to do or not to do a certain thing.

Conventional mortgage
A mortgage that is not insured or guaranteed by the federal government. Contrast with government mortgage.

Cooperative (co-op)
A type of multiple ownership in which the residents of a multiunit housing complex own shares in the cooperative corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.

Covenant
A clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in foreclosure.

Depreciation
A decline in the value of property; the opposite of appreciation.

Earnest money deposit
A deposit made by the potential home buyer to show that he or she is serious about buying the house.

Easement
A right of way giving persons other than the owner access to or over a property.

Eminent domain
The right of a government to take private property for public use upon payment of its fair market value. Eminent domain is the basis for condemnation proceedings.

Encroachment
An improvement that intrudes illegally on another’s property.

Encumbrance
Anything that affects or limits the fee simple title to a property, such as mortgages, leases, easements or restrictions.

Equity
A homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage.

Escrow An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit by a borrower with the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate.

FHA mortgage
A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.

First mortgage
A mortgage that is the primary lien against a property.

Fixed-rate mortgage (FRM)
A mortgage in which the interest rate does not change during the entire term of the loan.

Fixture
Personal property that becomes real property when attached in a permanent manner to real estate.

Flood insurance
Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas.

Foreclosure
The legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgaged property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.

Government mortgage
A mortgage that is insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS). Contrast with conventional mortage.

Hazard insurance
Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other hazards.

Home equity line of credit
A mortgage loan, which is usually in a subordinate position, that allows the borrower to obtain multiple advances of the loan proceeds at his or her own discretion, up to an amount that represents a specified percentage of the borrower's equity in a property.

Home inspection
A thorough inspection that evaluates the structural and mechanical condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser. Contrast with appraisal.

Homeowners' association
A nonprofit association that manages the common areas of a planned unit development (PUD) or condominium project. In a condominium project, it has no ownership interest in the common elements. In a PUD project, it holds title to the common elements.

Homeowner's insurance
An insurance policy that combines personal liability insurance and hazard insurance coverage for a dwelling and its contents.

Homeowner's warranty (HOW)
A type of insurance that covers repairs to specified parts of a house for a specific period of time. It is provided by the builder or property seller as a condition of the sale.

HUD-1 statement
A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing. The blank form for the statement is published by the Department of Housing and Urban Development (HUD). The HUD-1 statement is also known as the "closing statement" or "settlement sheet."

Insurance
A contract that provides compensation for specific losses in exchange for a periodic payment. An individual contract is known as an insurance policy, and the periodic payment is known as an insurance premium.

Insured mortgage
A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI). If the borrower defaults on the loan, the insurer must pay the lender the lesser of the loss incurred or the insured amount.

Interest
The fee charged for borrowing money.

Jumbo loan
A loan that exceeds Fannie Mae’s mortgage amount limits. Also called a nonconforming loan.

Lease
A written agreement between the property owner and a tenant that stipulates the conditions under which the tenant may possess the real estate for a specified period of time and rent.

Liability insurance
Insurance coverage that offers protection against claims alleging that a property owner's negligence or inappropriate action resulted in bodily injury or property damage to another party.

Lien
A legal claim against a property that must be paid off when the property is sold.

Liquid asset
A cash asset or an asset that is easily converted into cash.

Loan origination
The process by which a mortgage lender brings into existence a mortgage secured by real property.

vLoan-to-value (LTV) percentage
The relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has a LTV percentage of 80 percent.

Mortgage
A legal document that pledges a property to the lender as security for payment of a debt.

Mortgage banker
A company that originates mortgages exclusively for resale in the secondary mortgage market.

Mortgage broker
An individual or company that brings borrowers and lenders together for the purpose of loan origination. Mortgage brokers typically require a fee or a commission for their services.

Mortgagee
The lender in a mortgage agreement.

Mortgage insurance
A contract that insures the lender against loss caused by a mortgagor's default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency such as the Federal Housing Administration (FHA). Depending on the type of mortgage insurance, the insurance may cover a percentage of or virtually all of the mortgage loan. See private mortgage insurance.

Mortgage insurance premium (MIP)
The amount paid by a mortgagor for mortgage insurance, either to a government agency such as the Federal Housing Administration (FHA) or to a private mortgage insurance (MI) company.

Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

Origination fee
A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.

Owner financing
A property purchase transaction in which the property seller provides all or part of the financing.

Prepayment
Any amount paid to reduce the principal balance of a loan before the due date. Payment in full on a mortgage that may result from a sale of the property, the owner's decision to pay off the loan in full, or a foreclosure. In each case, prepayment means payment occurs before the loan has been fully amortized.

Prepayment penalty
A fee that may be charged to a borrower who pays off a loan before it is due.

Pre-qualification
The process of determining how much money a prospective home buyer will be eligible to borrow before he or she applies for a loan.

Prime rate
The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.

Principal
The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage. More.

Principal balance
The outstanding balance of principal on a mortgage. The principal balance does not include interest or any other charges. See remaining balance.

Principal, interest, taxes and insurance (PITI)
The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the amounts that are paid into an escrow account each month for property taxes and mortgage and hazard insurance.

Private mortgage insurance (MI)
Mortgage insurance that is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

Promissory note
A written promise to repay a specified amount over a specified period of time.

PUD (Planned Unit Development)
A project or subdivision that includes common property that is owned and maintained by a homeowners' association for the benefit and use of the individual PUD unit owners.

Purchase and sale agreement
A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

Qualifying ratios
Calculations that are used in determining whether a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.

Radon
A radioactive gas found in some homes that in sufficient concentrations can cause health problems.

Rate lock
A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time. See lock-in.

Real estate agent
A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

Real property
Land and appurtenances, including anything of a permanent nature such as structures, trees, minerals and the interest, benefits and inherent rights thereof.

REALTOR®
A real estate broker or an associate who holds active membership in a local real estate board that is affiliated with the NATIONAL ASSOCIATION of REALTORS®.

Recording
The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage or an extension of mortgage, thereby making it a part of the public record.

Replacement reserve fund
A fund set aside for replacement of common property in a condominium, PUD, or cooperative project -- particularly that which has a short life expectancy, such as carpeting, furniture, etc.

Second mortgage A mortgage that has a lien position subordinate to the first mortgage.

Secondary mortgage market
The buying and selling of existing mortgages.

Secured loan
A loan that is backed by collateral.

Security
The property that will be pledged as collateral for a loan.

Survey
A drawing or map showing the precise legal boundaries of a property, the location of improvements, easements, rights of way, encroachments and other physical features.

Title
A legal document evidencing a person's right to or ownership of a property.

Title company
A company that specializes in examining and insuring titles to real estate.

Title insurance
Insurance that protects the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property.

Title search
A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Underwriting
The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower's creditworthiness and the quality of the property itself.

VA mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.

For more information, please visit the following link: http://www.fanniemae.com/homebuyers/glossary.html