When you are looking for a car, house, furniture, or maybe even a tuxedo, you are going to ask yourself one question. Do I want to buy or rent? Everyone’s situation is different, so you must first understand your situation and your goal. For example, if you are planning on going to a high school prom and not planning on using the tuxedo again, you are going to most likely want to rent. You will not want to spend $250-$500 on a tuxedo that you are only going to use once in your life. If you are going to drive 20,000+ miles per year and do not always care about having a new car, then you are going to want to buy the car. If you are renting an apartment and you are not planning on staying there for the longterm, you may want to rent your furniture unless you believe you can seek further usage after you move on from that apartment. The larger topic at hand is renting versus buying a home. I believe this is a topic worth diving into because people can get themselves into financial trouble if not handled properly.
If you are planning on buying a fixer-upper as they say and staying in the home for only 3 to 5 years, it is very possible you will not gain much financially. Perhaps you are borrowing $100,000 for a home and only planning on spending, lets say 5 years in that home. You are going to pay property tax worth possibly $1,500 per year, interest worth possibly $14,000 based on 5% APR, and all the bills associated with living in a house. There will also be fees paid to a titling company, the mortgage company, and for inspections when purchasing the home. You are going to pay roughly $21,000 between just interest and property tax in 5 years. You will still owe roughly $80,000 on the mortgage, so if you sell the house for $120,000, which is $20,000 more than you purchased it, you will not have gained much if anything. Also, as a seller you will be responsible for a 6% commission to the realtor, which is $7,200 for a house that sells at $120,000. Usually with a fixer-upper, you will need to fix it up! This means you will need to spend money on maintenance to keep the house running. It is difficult to predict the amount of money you will spend on maintenance because each home has unique maintenance requirements.
Understanding the challenges of a short-term home purchase (<5years), you may want to explore your options in renting. Most rental properties can be reasonably priced and you are not typically responsible for the property tax. You are usually obligated to sign a 12 month lease minimum, which will require you to plan ahead 12 months at a time. Another benefit of renting is having the opportunity to live in a community prior to purchasing a home there. You can meet the locals and really understand if the community is a good fit for you. It may also be beneficial to rent if your career may require you to move to another location in the near future. Selling a home on short notice is usually never easy.
Usually, purchasing a home is a great investment until you sell too soon. It is the beginning of a mortgage when you are paying the highest interest dollars to the bank. At minimum, you will want to live 10 years in a home to truly benefit. In a perfect world, you will want to purchase a home you can live in forever, but we don’t live in a perfect world.
You may not have enough money in your younger years to purchase the house of your dreams. This may push you to renting for a while until you can save up enough money for a downpayment on the home. You will want to avoid PMI – Private Mortgage Insurance at any cost because this does not go to the principal and will not benefit you in any way. Monthly PMI can cost you as much as $300-400 per month depending on your credit rating and how much you are borrowing from the bank. It will be important to weigh all of your factors to make sure you are not jumping into something you are not ready for.
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