If the past few decades have been any indication, owning real estate versus renting remains a viable long-term solution for a lot of folks who want to boost their net worth while simultaneously paying for accommodations. (If we are not paying a landlord, we are paying a bank). And at this point in the economy and housing market, owning real estate now is as good a time as any given the lower prices as well as extremely low mortgage rates.
But there are instances where owning your own home may not make the best financial sense, as the past few years have indicated. The following three risk points provide some indication as to when individuals might be better off renting than owning.
1. Do you need two incomes to support your housing expenses. In instances where people are either married or working multiple jobs, ensuring that a single income can support the housing expenses is ideal. Better yet, ensuring that a single income can pay all necessary expenses allows for tremendous flexibility in the event of job loss or pay reductions. What people will want to avoid is having to sacrifice the basic necessities in order to make large mortgage payments if one income were to be reduced or eliminated altogether.
2. Do you have at least 25% equity in your home. Although coming up with equity to make your home purchase is definitely not easy when purchasing, ensuring that you have at least 25% equity in your home provide a substantial comfort zone should market conditions deteriorate. Of course, this might not have eliminated all risks associated with the recent housing market correction, but it would certainly provide enough initial comfort in the event of a fire sale. Equity also gives mortgage borrowers an edge in terms of negotiating restructures to the mortgage with a lender who is dealing with hundreds of other short sales and negative equity situations. Lack of equity exposes you to real long-term risks like bankruptcy and litigation.
3. Can you handle substantially higher payments in the event of increasing interest rates or higher rate resets. One of the problems that led to the housing crash is attributable to rate resets that people who lost their job and could not refinance had to take on. Anticipating higher rates during the house-shopping phase will allow borrowers to see just how financial flexibility they have. Planning for rates that at 2 times what the existing rates are may be aggressive, but working with such high numbers will provide enough of an indication as to whether you can withstand what is inevitable -- higher rates.
These tree pointers provide potential home buyers and mortgage borrowers with a few basic tips that they can use when planning for their home purchase. By anticipating such risks, borrowers will reduce the potential for losing what is arguably the largest investment they will make.
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