As financial decisions go, the decision regarding if and when to buy a home is pretty challenging. You've got plenty of financial considerations to contend with as well as personal issues.

Psychologically, many folks equate buying a home with settling down. After all, you'll be coming home to your home day after day, year after year. Of course, you can always move, but doing so can be costly and time consuming, and as a homeowner, you'll have a financial obligation to deal with.

Weighing Financial Considerations

You probably have already heard some arguments regarding the supposed financial benefits to owning a home. These include the notion of buying and owning a home for the tax breaks as well as the thinking that paying rent is analogous to throwing or flushing your money away.

The biggest homeownership costs (mortgage interest and property taxes), at least in the U.S. are generally tax-deductible. However, these tax breaks are already largely factored into the higher cost of owning a home. So you should never buy a home just because of the tax breaks.





Renting isn't necessarily like throwing your money away. In fact, renting can have a number of benefits, including:

• Renting sometimes costs less (sometimes much less) than owning. For example, in the mid-2000s, in some parts of the country, renting a given property cost about half the cost of owning that same property (monthly comparison even after factoring in the tax benefits of owning).
• You may be able to save more towards your personal and financial goals if you can rent at a relatively low cost. You can invest, for example, in other financial assets such as stocks, bonds, and funds (and may be able to do so through tax-favored retirement accounts).
• Renting has potential emotional and psychological rewards. You usually have more flexibility to pack up and move on as a renter. You may have a lease to fulfill, but you may be able to renegotiate it if you need to move on. As a homeowner, you have some major monthly payments to take care of. And, you have no guarantee that you can sell your home in a timely fashion or at the price you desire if you want to move.

Renting does have at least one big drawback: exposure to inflation (cost-of-living increases). As the cost of living increases, unless you live in a rent-controlled unit, your landlord can keep increasing your rent. By contrast, as a homeowner, your largest monthly expense (the mortgage payment) doesn't increase, assuming that you buy your home with a fixed-rate mortgage. Your property taxes, homeowners insurance, and maintenance expenses are exposed to inflation, but these expenses are usually much smaller in comparison to your monthly mortgage payment or rent.

Considering Your Time Frame

You will face significant costs when buying and selling a home. My analysis suggests that you will probably need at least three to five years of low appreciation to recoup your transaction (and maintenance) costs. Some of the expenses you face when buying and selling a home include the following:

• Agents commissions. Real estate agents generally charge a commission of 5 to 7 percent of the purchase price. Even if the seller is technically paying the commission out of the proceeds that they receive from selling a home, both the buyer and seller of a home are effectively paying commissions because they are built into the home's sales price.
• Inspection fees. When you buy a property, you should thoroughly check it out. Good inspectors can help you identify problems with the plumbing, heating, electrical systems, foundation, roof, pests like termites and so on. Property inspections typically cost at least a few hundred dollars up to $1,000 for larger homes.
• Moving expenses. Moving costs vary wildly, but you can count on spending hundreds to thousands of dollars. Costs, of course, increase with the distance you have to go and the amount of stuff you have.
• Mortgage costs. The costs of getting a mortgage include such items as the points (upfront interest that are about 1 to 2 percent of the loan amount), application and credit report fees, and appraisal fees.
• Title insurance. When you buy a home, you and your lender will want to protect yourselves against the small probability that the property seller doesn't actually legally own the home that you're buying. Title insurance protects you financially from unscrupulous sellers. While title insurance costs vary by area, 0.5 percent of the purchase price of the property is about average.

On top of all these transaction costs of buying and then selling a home, you'll also face maintenance expenses - repairs, cosmetic work, etc. - during your years of home ownership. To cover the typical transaction and maintenance costs of homeownership, the value of your home needs to appreciate about 15 percent over the years that you own it for you to be as well off financially as if you had continued renting. Counting on that kind of appreciation if you need or want to move elsewhere in a few years is risky.

Some people invest in real estate even when they don't expect to live in the home for long, and they may consider turning their home into a rental if they move within a few years. Doing so can work well financially in the long haul, but don't underestimate the responsibilities that come with rental property.

Deciding When to Buy

If you're considering buying a home, you may be concerned whether home prices are poised to rise or fall. No one wants to purchase a home that then plummets in value. And who wouldn't like to buy just before prices zoom higher?

It's not easy to predict what's going to happen with real estate prices in a particular town or neighborhood over the next few years. Ultimately, the economic health and vitality of an area drive the demand and prices for homes in that area. An increase in jobs, particularly ones that pay well, increases the demand for housing. And when demand goes up, so do prices.

If you buy your first home when you're before the age of 40, you will likely be a homeowner for many decades. Over such a long time, you will surely experience numerous ups and downs. But you'll probably see more ups than downs, so don't be too concerned about trying to predict what's going to happen to the real estate market in the near term and whether prices may fall a little. Of course, you should do a basic rent versus buy comparison to see if the properties you're considering offer a decent value or not. A silver lining to the late 2000s decline in home prices is that homes are more affordable than they have been in a long time and offer good value versus renting in many areas.

That said, you may be, at particular times in your life, ambivalent about buying a home. Perhaps you're not sure whether you'll stay put for five years. Therefore, part of your home-buying decision may hinge on whether current home prices versus the cost of renting in your local area offer you a good value. The state of the job market, the number of home listings for sale, and the level of real estate prices as compared to rent are useful indicators of the housing market's health.

Trying to time your purchase has more importance if you think you may move within a few years. In that case, avoid buying in a market where home prices are relatively high compared to rental costs. If you expect to move so soon, renting generally makes sense because of the high transaction costs of buying and selling real estate.

 

Copyright Eric Tyson, 2008 - 2013 all rights reserved.

Eric Tyson is the only best-selling personal finance author who has an extensive background as an hourly-based financial advisor and who does not accept speaking fees, endorsement deals or fees of any type from companies in the financial services industry or product or service providers recommended in his articles, books and his publications.