better to rent or buy??

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VictoriaF
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Post by VictoriaF » Sat Dec 19, 2009 7:02 pm

Opponent Process wrote:girlfriends are cheaper than wives.

serial monogamy is cheaper than divorce, alimony, and child support.
Scissors are cheaper than barbers :)

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Post by LadyGeek » Sat Dec 19, 2009 7:12 pm

Investopedia has 2 very interesting articles that breaks each topic into a pros & cons side of the argument. Might be a good way to rewrite the wiki article.

To Rent or Buy? The Financial Issues

To Rent or Buy? There's More To It Than Money

Suppose I owned a bus, but leased it.... Never mind.
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Post by RobG » Sat Dec 19, 2009 7:14 pm

Harold wrote:
Rob, if you do update the wiki, I hope you clarify what you mean by this.
Actually, I hope you clarify it anyway. I work with numbers all the time, yet have no clear idea what you're trying to say. However, I'm sure you've got a reasonable point, which I'd like to understand.

To me, what makes more sense is cash flows (i.e. how much has to be paid when, and how much is received when). Most of the time ownership expenses (e.g. taxes, interest, upkeep, etc. etc.) are unmentioned by those supporting owning. Since owning can be better, it would be nice for at least one such argument to account for that.
I'm not sure what you are asking but fshrp posted this link right after your message: Click Here It talks about price to rent ratio.

I agree about homeowners not accounting for taxes, interest, etc. Perhaps the biggest thing missed is the interest they would have earned on the money used for the down payment.

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Post by cheapskate » Sat Dec 19, 2009 10:32 pm

Aero

Unfortunately, the financially savvy thing is almost always to rent (save for places like Dallas or Houston where owning tends to be cheaper), but lifestyle choices frequently push one towards home ownership.

I am mulling over the same thing myself. Homes where I live are *very* expensive. A liveable 4BR home would set me back 1.2M-1.3M. Nice homes would set you back 1.5M+. By a stroke of fortune, I rent a smaller, older, "in need of remodeling" 4BR home for $2100/month (rent went up $100/month over 7 years. Started renting at $2000/month).

Every spreadsheet I've cobbled together tells me I should continue rent. The financial side of my brain tells me buying would be a terrible idea.

But, my kids are growing up. Each is clamoring for their own bedroom, we are outgrowing our house. There are serious lifestyle reasons for trading up. I could move to a bigger rental - which would set me back $3200-$3500/month. The issue there is finding a longer term rental with a good property manager (who'd attend to issues promptly).

At the end of the day, I think I'm going to be doing financial hara kiri and end up buying something, all the while knowing that 30 years from now, the house will likely not appreciate even with inflation (in real terms, I'd likely lose money).

If I were single or married with no kids (or 1 kid), I would never buy here.

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Post by Harold » Sun Dec 20, 2009 10:24 am

RobG wrote:
Harold wrote:
Rob, if you do update the wiki, I hope you clarify what you mean by this.
Actually, I hope you clarify it anyway. I work with numbers all the time, yet have no clear idea what you're trying to say. However, I'm sure you've got a reasonable point, which I'd like to understand.

To me, what makes more sense is cash flows (i.e. how much has to be paid when, and how much is received when). Most of the time ownership expenses (e.g. taxes, interest, upkeep, etc. etc.) are unmentioned by those supporting owning. Since owning can be better, it would be nice for at least one such argument to account for that.
I'm not sure what you are asking but fshrp posted this link right after your message: Click Here It talks about price to rent ratio.

I agree about homeowners not accounting for taxes, interest, etc. Perhaps the biggest thing missed is the interest they would have earned on the money used for the down payment.
The price to rent ratio seems like a rule of thumb based on averages and history. It may well be an excellent rule of thumb, but someone approaching a major real estate purchase/investment may want a bit more precision (or at least "proof" that the ratio is sufficient).

I was thinking more along the lines of looking at closing costs, mortgage interest, insurance, taxes, major appliance purchase/replacement, roof repair, lawn maintenance, etc. as cash outlays needed. That's a homeowner's "rent". (Of course mortgage interest will decline, to zero barring refinancing, but other costs remain.)

Much of the time (as Triple digit golfer points out) the landlord will more than recover those costs. But there are certainly extended periods where that's not the case, and the renter gets a better deal. (Maybe the owner has already incurred and recovered major costs, maybe the owner is taking a temporary loss due to market conditions, maybe the owner isn't yet recognizing the cost of a major renovation a decade or more away, ...)

That's the financial decision.

How money in excess of "rent" is invested is secondary. The owner is investing in the property, and the renter is free to invest in whatever asset class he chooses (or squander it). Any differences there are a risk management decision.

The owner likely will do more wallpaper replacing, get newer fancier appliances, etc. That's a consumption decision.

Despite my taking the time to post, I'm not that interested in arguing a point. But intellectually, I like clarity. There are merits to both perspectives, so I'm just encouraging a more complete explication of the ownership one.

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Post by VictoriaF » Sun Dec 20, 2009 10:59 am

cheapskate wrote:Aero

Unfortunately, the financially savvy thing is almost always to rent (save for places like Dallas or Houston where owning tends to be cheaper), but lifestyle choices frequently push one towards home ownership.
For me, it is fortunately. Honest. I hate the idea of spending time and effort on buying and maintaining a house. I also hate circumstances where I am aware of wasting money. In this case, I do what I like and don't hate anything about it. :)
cheapskate wrote:I am mulling over the same thing myself. Homes where I live are *very* expensive. A liveable 4BR home would set me back 1.2M-1.3M. Nice homes would set you back 1.5M+. By a stroke of fortune, I rent a smaller, older, "in need of remodeling" 4BR home for $2100/month (rent went up $100/month over 7 years. Started renting at $2000/month).

Every spreadsheet I've cobbled together tells me I should continue rent. The financial side of my brain tells me buying would be a terrible idea.

But, my kids are growing up. Each is clamoring for their own bedroom, we are outgrowing our house. There are serious lifestyle reasons for trading up. I could move to a bigger rental - which would set me back $3200-$3500/month. The issue there is finding a longer term rental with a good property manager (who'd attend to issues promptly).

At the end of the day, I think I'm going to be doing financial hara kiri and end up buying something, all the while knowing that 30 years from now, the house will likely not appreciate even with inflation (in real terms, I'd likely lose money).

If I were single or married with no kids (or 1 kid), I would never buy here.
You know your situation best. But I am wondering if your 4-bedroom, $2,200/month rented house is really inadequate. It sounds like an excellent solution for your needs.

Victoria
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Post by Triple digit golfer » Sun Dec 20, 2009 11:03 am

VictoriaF wrote:
cheapskate wrote:Aero

Unfortunately, the financially savvy thing is almost always to rent (save for places like Dallas or Houston where owning tends to be cheaper), but lifestyle choices frequently push one towards home ownership.
For me, it is fortunately. Honest. I hate the idea of spending time and effort on buying and maintaining a house. I also hate circumstances where I am aware of wasting money. In this case, I do what I like and don't hate anything about it. :)
I disagree that the financially savvy thing is almost always to rent. If you rent for 60 years, you're not going to come out ahead in most cases, even after factoring in interest on the down payment, maintenance and repairs, etc. Maybe in really booming real estate markets or in certain areas of the country, but in the vast majority of cases, renting for a lifetime isn't going to put you ahead of owning. It can't. The markets aren't THAT inefficient.

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Post by VictoriaF » Sun Dec 20, 2009 11:19 am

Triple digit golfer wrote:
VictoriaF wrote:
cheapskate wrote:Aero

Unfortunately, the financially savvy thing is almost always to rent (save for places like Dallas or Houston where owning tends to be cheaper), but lifestyle choices frequently push one towards home ownership.
For me, it is fortunately. Honest. I hate the idea of spending time and effort on buying and maintaining a house. I also hate circumstances where I am aware of wasting money. In this case, I do what I like and don't hate anything about it. :)
I disagree that the financially savvy thing is almost always to rent. If you rent for 60 years, you're not going to come out ahead in most cases, even after factoring in interest on the down payment, maintenance and repairs, etc. Maybe in really booming real estate markets or in certain areas of the country, but in the vast majority of cases, renting for a lifetime isn't going to put you ahead of owning. It can't. The markets aren't THAT inefficient.
Triple digit golfer,

The statement about financial savvy favoring renting was made by cheapskate, not by me. I don't know if it is true, but I am biased :)

While real estate markets "aren't THAT inefficient," staying in the same house for 60 years could be inefficient, too. People change their jobs several times during their careers, and the flexibility to move can result in higher lifetime income that would compensate for the extra cost of rental housing. Renting also allows one to live closer to the place of work thus reducing commuting time and cost. And people tend to tinker with their houses beyond what contributes to the increase in their value.

Victoria
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Post by cheapskate » Sun Dec 20, 2009 12:22 pm

VictoriaF wrote: You know your situation best. But I am wondering if your 4-bedroom, $2,200/month rented house is really inadequate. It sounds like an excellent solution for your needs.
Victoria
Yeah. That's why I have put of buying for so long - 20 years now :)

The pressure from the better half (and the kids) is mounting though, they are less convinced by Excel spreadsheet models :)

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Post by VictoriaF » Sun Dec 20, 2009 12:30 pm

cheapskate wrote:
VictoriaF wrote: You know your situation best. But I am wondering if your 4-bedroom, $2,200/month rented house is really inadequate. It sounds like an excellent solution for your needs.
Victoria
Yeah. That's why I have put of buying for so long - 20 years now :)

The pressure from the better half (and the kids) is mounting though, they are less convinced by Excel spreadsheet models :)
May be you could convert abstract spreadsheets into something tangible. For example, you could say that if you buy a house you will skip family vacations for the next 10 years, cut expenses on designer clothes, and send children to a state university. :)

Victoria
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Post by cheapskate » Sun Dec 20, 2009 12:31 pm

Triple digit golfer wrote: I disagree that the financially savvy thing is almost always to rent. If you rent for 60 years, you're not going to come out ahead in most cases, even after factoring in interest on the down payment, maintenance and repairs, etc. Maybe in really booming real estate markets or in certain areas of the country, but in the vast majority of cases, renting for a lifetime isn't going to put you ahead of owning. It can't. The markets aren't THAT inefficient.
Golfer

The comment about the financially savvy thing is almost always to rent was made by me.

Whether you make money on housing depends primarily on the valuation at entry point (like anything else). Valuation as measured by Price/Rent, Price/Median wage, total cost of ownership vs renting, demographic, job, salary trends in the targeted area etc.

I did qualify my statement that in large parts of the country, owning makes a lot of sense. In Texas for instance, costs of ownership are generally less than renting. Ditto in much of the southeast and midwest.

In certain coastal areas (I am biased against ownership being in California), valuation of residential real estate still remains insane.

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Post by VictoriaF » Sun Dec 20, 2009 12:36 pm

cheapskate wrote:In certain coastal areas (I am biased against ownership being in California), valuation of residential real estate still remains insane.
If you are in California, then a state university (that I mentioned in my previous reply) is not such a powerful threat. :)

Victoria
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Post by scubadiver » Sun Dec 20, 2009 1:21 pm

Opponent Process wrote:girlfriends are cheaper than wives.

serial monogamy is cheaper than divorce, alimony, and child support.
I disagree. Wives are way cheaper than girlfriends.

Ex-wives however are often quite expensive due to costs that you identified above.

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Post by Rodc » Sun Dec 20, 2009 6:48 pm

optimum psychological health: freedom when you're young, security when you're old.
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Post by LadyGeek » Tue Dec 29, 2009 2:22 pm

I updated the wiki page and would like some feedback. My hope is that I didn't detract from Dan Kohn's (original author) excellent writing. If I misworded anything or changed the intent, please let me know (wiki editors should fix directly).

I reorganized the article and added content because it didn't address some basic concepts. I deleted or updated some statements that appeared to be controversial. Hopefully, everything is in a balanced perspective.

The updated article for review: Please see Owning versus Renting - proposed update on the Bogleheads Wiki. Once everyone agrees on the content (or no one disagrees), I'll replace the existing article with this update.

For reference, the existing article: Please see Owning vs Renting on the Bogleheads Wiki.

Question: Is there any problem with the section on Inflation and Deflation? It seemed to contain forward-looking statements and I thought it should be deleted. Delete?

Comment: The section on Impact on Portfolio (Negative Bonds) contains corrections suggested by YDNAL in the referenced thread.
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Post by SpecialK22 » Tue Dec 29, 2009 4:21 pm

Not to sound too picky, but I don't particularly agree with this statement:
quote wrote: If you do not know that you will be in a property for more than 5 years, there is no financial advantage to owning a home. Renting is the best choice.
.

I agree that it is generally a good idea to plan on being in a home for around five years, but I question the absoluteness of the above quote. For example, I ran a buy vs rent scenario for my situation which included the following assumptions:

monthly rent based on what I have seen like units within the condo development listed.
20% downpayment
no closing costs (costs were either picked up by the seller or the credit union).
annual taxes input
added monthly condo assesment fees
cost of selling home: 6%
annual renovation costs: 1%
annual maintenance costs: .5%
annual home price appreciation: 0%
annual rent increase: 0%
rate of return on investments: 8%
inflation rate: 3.5%

Even with the above scenario, the NYTimes calculator says buying is better than renting after four years; however, after 15 years it begins to take a steep nose dive in favor of renting.

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Post by Justin618 » Tue Dec 29, 2009 4:21 pm

Just some back of the envelope considerations:

Consider purchasing a $100k house, 100% financed with a perpetual interest only loan at 5%. Assume home appreciates over long term at 3% (rate of inflation). Assume maintenance & property taxes each cost 1% of the value of house per year, thereby also increasing at inflation rate.

1st year costs = $5,000 interest + $1,000 maintenance + $1,000 Property Taxes
2nd year costs = $5,000 interest + $1,030 maintenance + $1,030 Property Taxes
50th year costs = $5,000 interest + $4,256 maintenance + $4,256 Property Taxes

1st year appreciation of house = $3,000
2nd year appreciation of house = $3,090
50th year appreciation of house = $12,768

Net costs to purchase (costs minus appreciation):
1st year = $4,000
2nd year = $3,970
50th year = $744

Although it’s possible/likely to rent a property for less actual out-of-pocket costs now and for the near term, the long term appreciation of housing acts as an inflation hedge mitigating the escalation of the cost of home ownership, whereas the renter has no such hedge of comparable scope. The delta in costs the renter is able to save/invest in early periods will be eventually offset by increased rents.

Considering the average person will have to pay for shelter for approx 50 years, the financially savvy decision for most people is to be a homeowner for most of those 50 years. However, moving often creates transaction costs and the property itself should be valued appropriately at purchase – relative to its substitution cost, renting for a period.

I imagine, in the really long term, even those underwater homebuyers in CA & FL may come out ahead provided they have low fixed rate mortgages – and do not first “strategically default”. A 5% fixed rate mortgage will probably look damn good in a few years.

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Post by LadyGeek » Tue Dec 29, 2009 5:15 pm

SpecialK22 wrote:Not to sound too picky, but I don't particularly agree with this statement:
quote wrote: If you do not know that you will be in a property for more than 5 years, there is no financial advantage to owning a home. Renting is the best choice.
I agree that it is generally a good idea to plan on being in a home for around five years, but I question the absoluteness of the above quote.
I think the statement makes sense if you have a lot of "don't know" factors. As you immediately pointed out, there's always a scenario that can go in either direction. Perhaps the point could be more subtle.

Any suggestions on how to reword it, or perhaps to move that statement somewhere else on the page, like under Relocation?
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Post by imagardener » Tue Dec 29, 2009 5:32 pm

I own but wish we were renting the house we own and had all that money in investments not house. Problem is we could not find a rental with the things we wanted, we looked and looked.

So if you have few demands on what kind of house/apartment you need renting is definitely preferable from a financial standpoint, hands down, as many previous posts make obvious.

However....the majority of the money we have accumulated comes from real estate...the majority of it from real estate purchased one, two or three generations before us. I did a XIRR spreadsheet on one of the smallest properties, my paternal grandparents. They had very modest incomes (homemaker and garbageman/janitor) but purchased 2 lots and built a home. When it was sold after 50 years it had a 12%/yearly return. Not bad.

We have no children and will not have a similar return on investment, except that we love where we live and enjoy it daily.

Rent until you have no other choice. Then buy with no anticipation of profit whatsoever.

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Post by norookie » Tue Dec 29, 2009 5:41 pm

imagardener wrote:I own but wish we were renting the house we own and had all that money in investments not house. Problem is we could not find a rental with the things we wanted, we looked and looked.

So if you have few demands on what kind of house/apartment you need renting is definitely preferable from a financial standpoint, hands down, as many previous posts make obvious.

However....the majority of the money we have accumulated comes from real estate...the majority of it from real estate purchased one, two or three generations before us. I did a XIRR spreadsheet on one of the smallest properties, my paternal grandparents. They had very modest incomes (homemaker and garbageman/janitor) but purchased 2 lots and built a home. When it was sold after 50 years it had a 12%/yearly return. Not bad.

We have no children and will not have a similar return on investment, except that we love where we live and enjoy it daily.

Rent until you have no other choice. Then buy with no anticipation of profit whatsoever.
GREAT POST.....if your "in the army now" and might get transferd I'd rent. Buying is for flipping a fixerupper fixed by YOURSELF or to support a family and keep them in one schooling system. = 20yrs these days. There are wants and needs. JMO.
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Post by SpecialK22 » Tue Dec 29, 2009 6:10 pm

LadyGeek,

Honestly, I don't think you can really determine a suitable cutoff for buy vs rent that applies to all situations. Generally speaking, the longer an individual plans to stay in a property the more favorable buying becomes. Nevertheless, using realistic numbers for the NYTimes calculator it shows that for my situation buying is better than renting after two years. Maybe in my area renting is in a bubble? :wink:

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Post by LadyGeek » Tue Dec 29, 2009 7:43 pm

SpecialK22 - Thank you. I reworded the statement and moved it to the Buy/Rent Calculator section. How does this look? Note that I used your info:
updated wiki article wrote:The Bogleheads' forum has suggested that if you do not know if you will be in a property for more than 5 years, there is no financial advantage to owning a home. Renting is the best choice in this case.[3]

With no other information, that is probably a good rule of thumb. However, stating that it's always better to stay in a house for (pick a number) years instead of renting may not be realistic. The situation varies with the individual. In some cases, the advantage can occur as early as 2 years. In other cases, it could be as late as 15 years, and for some it may never break even.[3]
I think one of the controversial points in the original article was the one that stated "For many properties, only after a decade do your principle payments generate enough equity to cover the transaction costs and make ownership less expensive than renting." That only occurred under certain conditions.

The updated wording eliminates that ambiguity and I think is much cleaner and objective. Please let me know if you think the wording should be updated.

I still want to retain that 5 year "rule of thumb", because it's a very useful guide as a place to start. However, it's very clear that you can do better with more information.

Please see Owning versus Renting - proposed update on the Bogleheads Wiki.
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Post by exeunt » Tue Dec 29, 2009 9:34 pm

I don't think this has been mentioned, but home ownership is great in high tax/high inflation scenarios. The income stream from a house is the imputed rent, or the rent you'd otherwise be paying for a similar place. Imputed rent isn't taxed, whereas rent is paid in after-tax dollars.

Let's say you buy a house for $100,000 in after-tax dollars. Thereafter, its annual "yield" or the imputed rent is tax-free. If you put an equivalent amount of money in stocks or REITs, the income is taxed.

Kotlikoff and Burns made this argument in The Coming Generational Storm.

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Post by Happydayz » Wed Dec 30, 2009 1:23 am

The longer you own a property the generally better decision it is over renting.

But what about purchasing a property with an eye toward rental? I am considering purchasing a condo that I plan to live in for at least 5 years. After that I could either stay in it, or if I need to move due to marriage/children/etc, rent it out.

Doing my math it seems that at about the 10 year point of ownership I can expect my rental income to offset my carrying costs. So worst case scenario I eat 5 years of negative cash flow, but afterward have a high value asset that is being paid down for me.

Granted, a financial risk, but I do have enough financial reserves to cover it. I also understand the opportunity cost of my downpayment - however I would still be able to max out my IRA and 401(k) contributions while doing this and not have to tap either for the downpayment.

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Post by imagardener » Wed Dec 30, 2009 9:56 am

Happydayz wrote:The longer you own a property the generally better decision it is over renting.
This may have been true in the days of property actually appreciating. Future results may not be the same.

Unlike passive investments (stocks, bonds, REITS) a property (house, condo) is more like a person that is aging, requiring maintenance/upkeep whether you live in it or maintain it as an income generating rental. It takes up your time and money. Passive investments only cost money when they are sold at a profit. Although the underlying land (if it's a single family home) can appreciate, any structure is always becoming less valuable as it ages.

And being a landlord is not for the faint of heart, not an easy way to earn money.

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Post by SpecialK22 » Wed Dec 30, 2009 10:25 am

LadyGeek,

I think your proposed entry sounds pretty good. Generally speaking, I don't like rule of thumb advice, particularly when it deals with situations which quickly become complex and can vary widely between individuals. But since the wiki is meant to be read by a general audience, I think that the advice of the five year rule is a decent starting point for someone considering buying vs renting.

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Post by RobG » Wed Dec 30, 2009 10:32 am

Happydayz wrote:The longer you own a property the generally better decision it is over renting.

But what about purchasing a property with an eye toward rental? I am considering purchasing a condo that I plan to live in for at least 5 years. After that I could either stay in it, or if I need to move due to marriage/children/etc, rent it out.
If you can come up with 20% down this can be a real good deal because you can get the loan at a "single family home" interest rate, which is much lower than a regular "investment" loan rate. You can even rent it out for a few years (two?) and then sell it and still not have to pay capital gains. If you can't come up with 20% down it may or may not be a good deal since you can't get as good loan.

rg

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Post by Almost there » Thu Dec 31, 2009 6:43 pm

Renting vs. owning.
I am renting, however, I also owned and the work on the house never ended. And this is the main reason I am now renting.

Ask people who purchased a home 3-5 years ago, whose home now has a lower value than when they purchased it. Or the people who lost their jobs and then their homes too.

I know they are many positive and negative sides to both renting and owning and everyone just has to decide for her/himself. I like not having to fix anything in my apt. When there is a problem, I just call Maintenance. In addition, during the summer months I spent basically every weekend away enjoying the warm weather. People who have a home can't do it since there is always much to do on their home.

Also, instead of buying, I have invested my hard-earned money with VG and am happy with that decision. At any time, I can move without any consequence of the present market. I guess it is something everyone has to decide. In addition, I also was brought up in a 1BR apt with 2 other siblings and am used to making due with just what I need.

Almost there

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Post by RobG » Thu Dec 31, 2009 6:58 pm

Almost there wrote: I know they are many positive and negative sides to both renting and owning and everyone just has to decide for her/himself. I like not having to fix anything in my apt. When there is a problem, I just call Maintenance. In addition, during the summer months I spent basically every weekend away enjoying the warm weather. People who have a home can't do it since there is always much to do on their home.
Yeah, I work on my house everyday so I guess I didn't go skiing today. Oh wait, I did go skiing today with the kids, and I'll be fishing tomorrow. Sat and Sunday are unplanned. Maybe I'll fix, oh wait, there is nothing wrong with my house. I don't even work on my house when there is something wrong... I just call the plumber or whoever directly instead of waiting for the landlord to get around to it. Sheesh, the magnitude of the baloney re this subject never fails to amaze me. :wink:

rg

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Post by Zander » Thu Dec 31, 2009 11:52 pm

My two cents.....

Buy a house that you can afford using a 15 year fixed rate mortgage. If you keep the house for 15 years - you own it. Owning a home may not earn you a huge return, but it is not likely to hurt you over long periods of time. You have to live somewhere, I prefer my own home.

For me, the psychological benefits of owning a home are priceless.

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Post by LadyGeek » Fri Jan 01, 2010 11:06 am

SpecialK22 wrote:LadyGeek,

I think your proposed entry sounds pretty good. Generally speaking, I don't like rule of thumb advice, particularly when it deals with situations which quickly become complex and can vary widely between individuals. But since the wiki is meant to be read by a general audience, I think that the advice of the five year rule is a decent starting point for someone considering buying vs renting.
Thanks, I fully concur. The wiki is intended as a tutorial, but with the added insight of the forum "experts". It's the same type of advice as "your age in bonds". With no other information, you have some inkling of where to start.

Does anyone have any additional comments about the wiki article? The intent is to present an objective view of things you need to know when deciding to rent or own a home. For personal use only, not business related.

Please see Owning versus Renting - proposed update on the Bogleheads Wiki. Compare to Owning vs Renting (the controversial article).

RobG has some comments pending, but he's gone fishing :).
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Post by Gigi » Sun Jan 03, 2010 12:50 pm

Thank you for your service.

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Post by sscritic » Sun Jan 03, 2010 1:17 pm

LadyGeek wrote:
Does anyone have any additional comments about the wiki article? The intent is to present an objective view of things you need to know when deciding to rent or own a home. For personal use only, not business related.

Please see Owning versus Renting - proposed update on the Bogleheads Wiki. Compare to Owning vs Renting (the controversial article).
Pub 936 says:
For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.
proposed wiki says:
Plus, the deduction phases out at a high income, and is not available on a second home or with a large set of mortgages.
I propose correcting the proposed wiki page to follow IRS regulations relative to second homes. Since the current wiki page contains the same statement, I propose in the case that the proposed page is rejected that the current page be corrected to follow IRS regulations.

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Post by LadyGeek » Sun Jan 03, 2010 2:05 pm

sscritic - Thank you.

I updated the existing page with the "Proposed" version and made the correction. The reference to a second home is now in the footnote (the page is intended for primary residences).
wiki wrote:There is a large taxation benefit to owning a home versus renting, but it is not the mortgage interest deduction. That deduction is only open to the 30% of taxpayers who itemize their deductions. Plus, the deduction phases out when certain limits are reached.[5]

5. ↑ The deduction also applies to a second home. See IRS Publication 936, Home Mortgage Interest Deduction.
Please see Owning vs Renting on the Bogleheads Wiki.

The "Proposed Update" page is now deleted as it's no longer needed. You can always view the previous (controversial) version by looking at the "history" tab at the top of Owning vs Renting.
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Post by cjackson0 » Sun Jan 03, 2010 2:41 pm

Petrocelli wrote: I own, so I think you should buy. However, buy the cheapest house in the best area you can afford.
Disclosure: I own

But I don't necessarily agree with Petro's suggestion.

I think the part that gets a lot of people into trouble is the "best area you can afford" section. When you get into that area, you have a social network of friends and neighbors (even more-so if you have children playing with the other neighborhood kids) and if you want to fit in with them you will try to do the same things they do, and buy the same things they do. If you are a blue-collar professional who makes a good living working with his hands you may be able to find a real bargain in a neighborhood full of doctors and lawyers who drives BMW's and wear thousand dollar suits everyday. But once you're there, you're going to feel out of place at the neighborhood BBQ in your comfortable jeans with a beat up F150 work truck outside. All of a sudden, your wife wants to join the country club because all the other wives have lunch there 3 times a week, and you put in a swimming pool because everyone else has one. Your front landscaping looks bland and your grass never shines like all your neighbors who use lawn care services.

The best way to not feel you have to keep up with the Joneses, is to not live next to the Joneses in a different socio-economic status.

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Post by Beagler » Sun Jan 03, 2010 2:47 pm

RobG wrote:
Almost there wrote: I know they are many positive and negative sides to both renting and owning and everyone just has to decide for her/himself. I like not having to fix anything in my apt. When there is a problem, I just call Maintenance. In addition, during the summer months I spent basically every weekend away enjoying the warm weather. People who have a home can't do it since there is always much to do on their home.
Yeah, I work on my house everyday so I guess I didn't go skiing today. Oh wait, I did go skiing today with the kids, and I'll be fishing tomorrow. Sat and Sunday are unplanned. Maybe I'll fix, oh wait, there is nothing wrong with my house. I don't even work on my house when there is something wrong... I just call the plumber or whoever directly instead of waiting for the landlord to get around to it. Sheesh, the magnitude of the baloney re this subject never fails to amaze me. :wink:
And if renters don't think the costs of maintenance are being passed along to renters, then they're fooling themselves.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

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Post by Petrocelli » Mon Jan 04, 2010 12:56 am

cjackson0 wrote:
Petrocelli wrote: I own, so I think you should buy. However, buy the cheapest house in the best area you can afford.
Disclosure: I own

But I don't necessarily agree with Petro's suggestion.

I think the part that gets a lot of people into trouble is the "best area you can afford" section. When you get into that area, you have a social network of friends and neighbors (even more-so if you have children playing with the other neighborhood kids) and if you want to fit in with them you will try to do the same things they do, and buy the same things they do. If you are a blue-collar professional who makes a good living working with his hands you may be able to find a real bargain in a neighborhood full of doctors and lawyers who drives BMW's and wear thousand dollar suits everyday. But once you're there, you're going to feel out of place at the neighborhood BBQ in your comfortable jeans with a beat up F150 work truck outside. All of a sudden, your wife wants to join the country club because all the other wives have lunch there 3 times a week, and you put in a swimming pool because everyone else has one. Your front landscaping looks bland and your grass never shines like all your neighbors who use lawn care services.

The best way to not feel you have to keep up with the Joneses, is to not live next to the Joneses in a different socio-economic status.
Holy Toledo. I didn't advise the guy to move in to Jed Clampett's house. I was offering my opinion as to how to make money in real estate.

I bought the cheapest house in the best neighborhood I can afford. The guy who owned the house before me was a plumber. The guy who lives next to me is a contractor and drives a Chevy truck. Next to him is a college professor, who does drive a late model BMW. Across the street is a doctor. As far as I know, I am the only person on the street with a country club membership.

You are right about the lawn though. If you move in to my neighborhood, and let the lawn die, you will be ostracized from the block party.
Petrocelli (not the real Rico, but just a fan)

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Post by squirrelfork » Mon Jan 04, 2010 10:37 am

I read this somewhere recently and agree with it for the most part. Sometimes we consider renting as "lost money" since you aren't increasing your ownership in the property.

So what? It's not lost money. It's a living expense, the same as food or health insurance costs.

Owning your home is nice, unless you end up paying on something that has lost value since you bought. I think real estate as an investment is highly overrated, unless you are doing it to get cash flow from renters each month, in which case it may make sense.

Many benefits of renting: when the building gets old and starts to have maintenance problems, you can leave and rent in a newer apartment building elsewhere. No huge down payment or real estate taxes. Plus the management has to do your repairs if it's their fault. At my stage in the game, I prefer renting. Plus who knows if you'll be in the same city 5 years from now. Your work, well in your case the military, may take you elsewhere. :)

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Post by sscritic » Mon Jan 04, 2010 11:10 am

I don't consider mortgage payments a housing expense.

A rents and has $1,000k in investments
B owns a $500k home and has $500k in investments
C owns a $500k home, has $900k in investments, and owes $400k on a loan that allows him to own both a $500k home and the $900k in investments.

Why would you consider the cost of C's borrowed money a housing expense? It is a borrowing expense. The borrowing is irrelevant to the rent vs own decision. The proper comparison is between A and B. Subtracting out the common part of the investments, we should be comparing

A' rents at $XXX a month and has $500k in investments
B' owns a $500k home and has no investments.

A' pays rent, insurance, and minor household expenses and has a net worth that grows from dividends and capital gains (realized and unrealized) less taxes over a given period.
B' pays property taxes, possibly homeowner's dues, more for insurance, and more for household expenses. His net worth grows by the capital gain (which is given a tax preference) in the home price over the same period.

Whether either A' or B' wants to borrow money to increase the size of the investment portfolio is irrelevant. It is true that B' is given a tax preference for his borrowing relative to A'. If renting and owning are roughly equal, the two tax preferences given to the homeowner should tip the scale toward ownership, but they won't overcome a large discrepancy in net costs (costs - increased net worth).

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Now we have a meaningful comparison

Post by mootvester » Fri Jan 08, 2010 1:16 pm

I personally think the below is the most thoughtful and meaningful comment on the thread thus far. Some of the other so-called 'investment questions' scutter so rapidly around the central cost comparions, that it's easy to get sucked in to questions of subjectivity. (Proximity to work? Time spent fixing the house? That's completely irrelevant to people who live in cities, for example). It would be interesting if someone were to volunteer to pump numbers into the below comment by sscritic, which I think would make a far more interesting, and scientific comparison. Wiki-material, even.

Let me throw out this bit, just to further muddle the waters. I live in NYC, a housing market so bizarre that the comparison of rent versus buying (a question I'm posing myself right now actually), becomes an incredibly complex calculation. First off, the 'costs' are more complex: the vast majority of purchasable housing in Manhattan is in the form of co-ops, that comes with high maintenance ($800-1200 for $500K units, partially tax deductible, and inclusive of prop taxes), stipulations of 25% or higher down-payment requirements, and inflexibility to sublet. Yet, new condo developments are frequently tax-abated, and have small maintenance fees. Closing costs for either hover around 5-6%. The second layer of complexity comes with the unique way in which housing appreciates here. Indexed for inflation? You're dreaming. Maybe over a one hundred year timeframe, but certainly not in the last 20 years. Anyone who bought 20 years ago is today much richer than if they had invested in some passive index fund. We're not in some desert or open space here with an elastic capability of adding new units on the fly; this city has strict limits on building construction while the population density has vastly increased, and the space is finite (especially waterfront space). Today, for example, about 50% of recent sales have been by foreign buyers, since the dollar's cheap and the city is an international hub. For what it's worth, 70% of units are rentals, and until recently (i.e. financial meltdown) vacancy rates in the rentals hovered around 1%. You can guess what that means about rental costs.

Housing isn't any more of a black box investment than a mutual fund or a stock. Your purchasing decision will take into account the neighborhood you're buying in (is it gentrifying? Is it in a central location? is crime going up? what industry is nearby? etc etc.), just as it will consider the structural integrity of the unit, property taxes, etc. etc. It's a risk, but you minimize it.

It's just so complex a decision (speaking as a renter of 8+ years), I hate to keep seeing this lame comparison of average stock price indexes versus "oh, just 3%, minus the cost of your new roof and time mowing the lawns." NYC prices aren't indexed for inflation like those broad average statistics like to say (which miss the trees for the forest), and most of us never have to worry about crawling on our roofs or mowing our lawns (unfortunately for the latter, I wouldn't mind a lawn!)

Rant over...
sscritic wrote:I don't consider mortgage payments a housing expense.

A rents and has $1,000k in investments
B owns a $500k home and has $500k in investments
C owns a $500k home, has $900k in investments, and owes $400k on a loan that allows him to own both a $500k home and the $900k in investments.

Why would you consider the cost of C's borrowed money a housing expense? It is a borrowing expense. The borrowing is irrelevant to the rent vs own decision. The proper comparison is between A and B. Subtracting out the common part of the investments, we should be comparing

A' rents at $XXX a month and has $500k in investments
B' owns a $500k home and has no investments.

A' pays rent, insurance, and minor household expenses and has a net worth that grows from dividends and capital gains (realized and unrealized) less taxes over a given period.
B' pays property taxes, possibly homeowner's dues, more for insurance, and more for household expenses. His net worth grows by the capital gain (which is given a tax preference) in the home price over the same period.

Whether either A' or B' wants to borrow money to increase the size of the investment portfolio is irrelevant. It is true that B' is given a tax preference for his borrowing relative to A'. If renting and owning are roughly equal, the two tax preferences given to the homeowner should tip the scale toward ownership, but they won't overcome a large discrepancy in net costs (costs - increased net worth).

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Post by longview » Sat Jan 09, 2010 6:30 pm

In southern CA, rent seems to be 3%-4% or so of purchase price. http://patrick.net/housing/crash.html makes the point that this is cheaper than 6% mortgage.

I tend to agree that rent is a more realistic indication of what housing prices can actually be -- what people can actually pay vs what corrupt/clueless banks are willing to lend. So when the ratio gets very out of whack it's hard to ignore that housing is "inflated."

My only other issue is how interest rates are at historic lows -- so how can housing not crash as soon as rates creep up?

I think now, in CA, is a good example of a situation when renting would be better financially. But, what is the downside? Is there a situation where renting is actually more expensive than buying? A mortgage would be more expensive with higher-interest rates, but what if you compare buying cash vs investing cash and renting?

On the question of how can people afford to rent houses... at least around here it looks like older folks renting houses that appreciated nicely with the CA surge... or people who inherited them. But I wouldn't count on tip-top service for your renting dollar.

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Post by longview » Sat Jan 09, 2010 6:34 pm

Other random question that occurred to me. Why do businesses rent office space rather than buying? Seriously.

Even small businesses I've been in rent office space (and spend a ton building it out) in a building or office park when they could buy a house/warehouse/building/etc and build it out.

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Re: Now we have a meaningful comparison

Post by VictoriaF » Sat Jan 09, 2010 6:47 pm

mootvester wrote:I personally think the below is the most thoughtful and meaningful comment on the thread thus far. Some of the other so-called 'investment questions' scutter so rapidly around the central cost comparions, that it's easy to get sucked in to questions of subjectivity. (Proximity to work? Time spent fixing the house? That's completely irrelevant to people who live in cities, for example). It would be interesting if someone were to volunteer to pump numbers into the below comment by sscritic, which I think would make a far more interesting, and scientific comparison. Wiki-material, even.
I agree that sscritic's message was quite good but don't underestimate the value of the flexibility to move. New York City is somewhat unique in this sense. Everybody seems to commute by pubic transportation, and it is available wherever you live. Washington is different. Many people drive, many drive for hours each way. If an agency relocates, its employees and contractors have to choose between a large increase in their commute time (and cost) and selling their house in a down market.

Outside NYC and DC, people cannot even expect to get a new job in the same city if they lose one.

And so yes, sscritic provided a good comparison of the core financial aspects, but the intangibles I mentioned could compensate, for example, for tax breaks home owners have.

Victoria
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Re: Now we have a meaningful comparison

Post by JMacDonald » Sat Jan 09, 2010 9:27 pm

VictoriaF wrote: New York City is somewhat unique in this sense. Everybody seems to commute by pubic transportation, and it is available wherever you live.

Victoria
Hi Victoria,
Granted there are a lot of people in NYC that use public transportation, but I sure have to watch for all those cars on the street when I am there. I will visiting there next week. I wonder if the snow slows those cars down a bit.

As far as renting or buying, I think it is too much a personal situation to say one way or another. For myself, buying a condo has worked out fine. That is because I have stayed in the same place for 23 years, and managed to lower my mortgage a few years ago by refinancing. I now live in this condo for about a third of what it would cost to rent. Also, I don't have a landlord telling me I can't have my cats. :D
Best Wishes, | Joe

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Re: Now we have a meaningful comparison

Post by VictoriaF » Sun Jan 10, 2010 10:43 am

JMacDonald wrote:
VictoriaF wrote: New York City is somewhat unique in this sense. Everybody seems to commute by pubic transportation, and it is available wherever you live.

Victoria
Hi Victoria,
Granted there are a lot of people in NYC that use public transportation, but I sure have to watch for all those cars on the street when I am there. I will visiting there next week. I wonder if the snow slows those cars down a bit.

As far as renting or buying, I think it is too much a personal situation to say one way or another. For myself, buying a condo has worked out fine. That is because I have stayed in the same place for 23 years, and managed to lower my mortgage a few years ago by refinancing. I now live in this condo for about a third of what it would cost to rent. Also, I don't have a landlord telling me I can't have my cats. :D
Hi Joe,

I used to live in New Jersey and come to New York City at least once a month. My impression is that if a half of public-transport commuters chose to drive, the city streets would be indistinguishable from parking lots. Of course, traffic is subject to the same "invisible hand" as the economy, and whatever you will encounter next week will be optimal.

I agree that renting or buying is largely dependent on a personal situation. It is easier to raise children in an owned home, and children require the stability of residence, anyway. A local public servant (teacher, firefighter) also has good reasons for staying in the same community.

Buying housing is prudent when it is relatively cheap in comparison to local wages. If one loves working on the house, gardening, entertaining large parties, and alike, a rented apartment will not do. If one prefers to use spare time on reading books, studying The Teaching Company's materials and traveling, a house is a hindrance.

Buying may work well during a real estate decline when one takes chances that the area will recover. This was the case in several major metropolitan areas (San Francisco, Los Angeles, Washington, etc.). But if you were considering buying your condominium today, would you do it?

Yes, it all comes down to the personal choice. One difference is that the default choice still seems to be buying, and I am trying to explain that an alternative choice may be prudent ... and that renting is not synonymous with poverty or poor judgment.

Victoria
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Post by aadwen » Sun Jan 10, 2010 11:11 am

I bought a nice 3/2.5 house for 129.5 @ 4.5% and my payment each month is just under 1k which includes taxes and insurance, I was paying 895 for a duplex.

I got a FHA loan b/c I didnt want to put down 20%, plus the mortgage insurance premium is lower on FHA than conventional, plus the mortgage is assumable, which means I can transfer the loan to a buyer in the future and they can keep the 4.5% interest rate (with minimal closing costs), which will be ideal when it comes time to sell and Im assuming interest rates will eventually go up!

Throw in the fact that I got 8k from you guys to help me buy my house, I used that money to pay off my Truck which was @ 7.5%.

Only major issues with house so far have been a call to a plumber b/c the wife flushed something down the toilet. I made sure the house i got had a fairly new roof and this one had a brand new heating/ac system as well.

I couldnt be happier.

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Re: Now we have a meaningful comparison

Post by JMacDonald » Sun Jan 10, 2010 11:52 am

VictoriaF wrote: I used to live in New Jersey and come to New York City at least once a month. My impression is that if a half of public-transport commuters chose to drive, the city streets would be indistinguishable from parking lots. Of course, traffic is subject to the same "invisible hand" as the economy, and whatever you will encounter next week will be optimal.
Hi Victoria,
You have to wonder where people park all those cars you see on the road. I though the same thing when I was in London last October.
Buying may work well during a real estate decline when one takes chances that the area will recover. This was the case in several major metropolitan areas (San Francisco, Los Angeles, Washington, etc.). But if you were considering buying your condominium today, would you do it?
I probably would not be able to afford buying the same condo today as I am retire from teaching now. The mortgage and property tax would take a big bite out of my retirement check. I certainly would not be able to take a self indulgence trip to NYC as I am doing next Tuesday. :D

I do think buying pays off when you know you will be staying in one place for a long period of time. Before I bought this condo, I always rented a place that was certainly cheaper than buying. I think unless people plan to stay put for ten years, they may be at risk of losing money if they buy.
Best Wishes, | Joe

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Post by longview » Sun Jan 10, 2010 8:08 pm

plus the mortgage is assumable, which means I can transfer the loan to a buyer in the future and they can keep the 4.5% interest rate (with minimal closing costs), which will be ideal when it comes time to sell and Im assuming interest rates will eventually go up!
I thought Banks killed this during my parents generation? An assumable mortgage would be like gold to a buyer... what are the specifics to making this possible?


Another random question... has anyone sold their house and "held the paper" instead of renting? You get the down payment, you get the house back if they can't pay, and otherwise you are getting the interest the bank would get. I assume the possibility of having to foreclose is the killer.

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Post by RobG » Sun Jan 10, 2010 10:41 pm

LadyGeek wrote:sscritic - Thank you.

I updated the existing page with the "Proposed" version and made the correction. The reference to a second home is now in the footnote (the page is intended for primary residences).
wiki wrote:There is a large taxation benefit to owning a home versus renting, but it is not the mortgage interest deduction. That deduction is only open to the 30% of taxpayers who itemize their deductions. Plus, the deduction phases out when certain limits are reached.[5]

5. ↑ The deduction also applies to a second home. See IRS Publication 936, Home Mortgage Interest Deduction.
Please see Owning vs Renting on the Bogleheads Wiki.
Thanks for doing all this. I think the paragraph is still poisoned with biased wording... e.g. it should read "The mortgage interest is deductible if you itemize, but the amount of deductible interest is limited for high income filers (http://www.irs.gov/publications/p17/ch29.html)."

Whether or not it is the best tax advantage is not for him to say. Nor does the "only 30%" add any relevance... it is just there to skew the tone towards the result he wants you to believe.

Sorry I haven't been more help; my time these days is all spent working on my home (ha ha, just kidding. been doing kids, skiing, fishing, increasing the rent of my tenants, etc). Actually, I see so much biased wording, not to mention the whole way the question is framed, that I get discouraged with the task of trying to patch it up. I think some great progress has been made. Thanks.

rg

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Post by aadwen » Sun Jan 10, 2010 10:42 pm

You can assume an existing FHA-insured loan, or, if you are the one deciding to sell, allow a buyer to assume yours. Assuming a loan can be very beneficial, since the process is streamlined and less expensive compared to that for a new loan. Also, assuming a loan can often result in a lower interest rate. The application process consists basically of a credit check and no property appraisal is required. You must demonstrate that you have enough income to support the mortgage loan. In this way, qualifying to assume a loan is similar to the qualification requirements for a new mortgage loan.

pulled off a bank website

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