The Times says that “after five years in which rents have barely budged while house prices in New York, Washington, Los Angeles and elsewhere have doubled, renting has become a surprisingly smart option for many people who never would have considered it before.” (See: Is It Better to Buy or Rent? September 25, 2005)

As evidence, the paper looks at ownership and rental costs over five years and finds that “when the net costs of owning are less than those of renting, as is the case in Chicago, Dallas, St. Louis and much of the middle of the country, the argument for buying becomes overwhelming. So long as home prices do not fall sharply, home buyers in these places will do much better than renters.

“But when owning is more expensive every month,” says the Times, “buyers are betting entirely on price appreciation.”

The problem with this analysis, as with all economic projections, is that we don’t actually know what will happen in the future. Moreover, as the Times observes, counting on price appreciation has been a very good bet in the past few years in most metro areas — whether it will also be a good bet in the next few years is unknown.

If you look at many high-priced areas you can see that renting — on the basis of today’s costs — is far cheaper than buying. For instance, in my area a $450,000 home might rent for $2,000 a month. The renter has paid no money down other than a deposit and can invest the money not used for purchasing.

An owner, meanwhile, may have a 90 percent loan at 6 percent. Over 30 years the monthly cost for principal and interest for a $405,000 mortgage will be $2,428.18, property taxes might be another $250 a month and insurance is perhaps another $50. In addition, the owner is losing the interest that might have been earned on the $45,000 down payment plus thousands of dollars in closing costs. In rough terms our owner has an effective monthly cost of perhaps $2,800 or $2,900 — before tax write offs such mortgage interest, depreciation and property taxes.

So yes, the renter spends less cash per month — at least at first. But is the renter ahead?

• We don’t know what will happen with home prices — it’s possible they could rise and it’s also possible they could fall. This is the core “x” factor.
• The Times article says nothing about amortization. For those with a fixed-rate loan, the balance falls each month. Even if home prices stay the same, equity increases.
• Financing rental properties with ARMs, option financing, interest-only mortgages, etc. means that monthly loan costs can change — bad news for owners if interest rates rise or if the properties are not refinanced with fixed-rate mortgages before higher monthly payments kick-in.
• Renters may get income from money not invested in real estate — but they do not get write-offs for property taxes, depreciation, etc.
• Rents can increase.
• Rental properties can be vacant, require repairs and have associated costs such as management expenses.
• Ownership over five or ten years does not really reflect investment trends. What often happens is that Smith owns an investment property for a few years, sells and then buys a replacement property to avoid capital gains taxes. Equity from the first property is used to reduce costs for the replacement property or to buy a more expensive investment. In effect, the value of amortization and equity growth is often passed through a chain of related investment purchases.
• The value of real estate is measured in dollars. As inflation erodes dollar values, it takes more cash to buy a typical home. When the value of the property grows faster than the rate of inflation real wealth is created — a real estate benefit unavailable to renters.
• When investors sell they typically get the advantage of low capital gains tax rates. When they die, properties are passed through to heirs at their stepped-up value which means there is no tax on the capital gains — but there may be an estate tax if the estate is sufficiently large and not properly planned.

The bottom line is that buying real estate represents real risk — and so does renting. Given a choice, I prefer ownership if only because it’s hard to find long-term real estate investors who are poor.

But that’s just me.

————————
Published originally by Realty Times on October 10, 2005 and posted with permission.

Is Now The Time to Rent? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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For financial reasons and as a matter of personal preference, many people favor a home with less debt. Why wait 30 years to be mortgage-free, they reason, when the same goal can be accomplished years earlier without refinancing or new closing costs.

If prepaying a loan seems attractive, the first question to ask is whether prepayments are permitted without penalty. Some loans punish borrowers for the crime of debt reduction by insisting on a penalty if some or all of the loan is paid in advance.

The good news regarding prepayment penalties is that they seem less frequent and less harsh than in the past. In some cases today, penalties expire after several years. With other loans, prepayment penalties only kick-in after a certain point, say when there has been an annual loan reduction of more than 20 percent.

In some cases there are loans which lack penalties but have specialized prepayment rules. For instance, under the FHA program if a prepayment is made after the monthly payment due date it will not be credited to the account until the next month. In essence, the borrower could lose the benefit of a prepayment for as much as several weeks.

In practice what you’re likely to find now is that lenders want your money as soon as possible. Forget penalties, say lenders, write bigger checks.

The change of heart (yes, lenders have hearts) relates to a new view of risk. It’s nice to get extra money from penalties, but lender portfolios are more secure when borrowers owe less.

You don’t have to prepay much to significantly reduce loan payoff times. For example, suppose you have a $200,000 mortgage at 8 percent interest. Pay $1,467.53 for principal and interest and the loan will be repaid in 30 years. Pay an additional $100 a month and the debt will be retired six years early. Pay $200 a month extra and you can be out in a little more than 20 years.

At this point someone will wonder whether $100 might be better spent in the stock market or with the purchase of pork bellies. There’s no sure answer here because we don’t know how stocks or commodities will be valued in the future. We DO know that by reducing the mortgage we are effectively cutting debt that must ultimately be repaid.

Does prepaying a home mortgage always make the most financial sense?

Because the interest cost for credit cards is typically higher than home loans, and because credit card interest is not tax deductible, if one must choose either one or the other, then reducing credit card debt is likely a better plan than accelerated mortgage payoffs — as long as credit card balances fall over time.

If the question concerns auto loans, the answer is different: Their interest is usually front-loaded so prepayments may not result in significant gains.

Of course, there’s no rule which says homeowners can’t prepay loans, pay-down other debts, or shift a few dollars into the stock market.

What about taxes? If a home mortgage is prepaid, interest deductions decline but this is hardly a problem.

Which would you rather pay: $1 in interest or perhaps 31

How And Why To Prepay Your Mortgage is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Third-party non-lenders collect payments bi-weekly and then make payments to the original lenders. This is something that any borrower not facing pre-payment penalties can do without paying several hundred dollars up front to a third-party, or a few dollars with each payment.

As well, those interested in bi-weekly mortgages should ask if the third party non-lender is licensed, insured (how much), bonded (how much), etc. Ask if there is a requirement for the third-party lender to hold funds in an escrow account, an important protection in the event of a bankruptcy, judgment, or fraud.

Also, while borrowers may be making bi-weekly payments, some bi-weekly non-lenders do not. Instead, with some programs 11 regular payments are made as well as a larger 12th payment. Thus the borrower does not get the full benefit of a true bi-weekly schedule.

But, who needs a bi-weekly program? That just means 14 extra checks to write each year. If you have a loan without prepayment penalties a far-easier approach is to simply increase your monthly payment. Since lenders do not want to process an additional 14 payments a year — and generally won’t, steady pre-payments will be greatly appreciated under most loan programs.

Speak with your lender about available options if you have an interest in prepaying your mortgage. Be certain to ask about any prepayment penalties.

Are All Bi-Weekly Mortgage Programs The Same? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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