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                               Buying Vs Renting

A very popular Ad in television now a days from Shahrukh Khan saying “Chota ho ya bada apna Ghar kharidne ka sapna zarur dekhein” is very much in Air. Are loan providers or Home developers companies are really working to make their dreams into reality ? But Is renting or buying a financial bet?

Buying a home in order to build equity is one of the main financial reasons prospective buyers jump into the market. Now a days Real Estate transactions, especially buying a home is not a small task. The common wisdom for decades was to buy a house as soon as you can, but it involves lots of big transactions. That wisdom turned lots of people upside down in the past decade. Homeowners and prospective homeowners may now look more closely at the costs and benefits of such a large transaction.

Yet while the sobering effects of the housing crisis may have prompted a more cautious approach by buyers who are more realistic about the level of equity they can build in their homes, the drive to be a homeowner remains strong. It’s mostly about freedom: The ability to paint the walls whatever color you want, or know that a landlord is not going to raise your rent or ask you to leave.

Till the late 1980s, it was the standard middle class dream to be able to somehow cobble enough money to buy one’s home. You scrimped and saved for many years, sold some family jewels and borrowed from friends and family. Overtime, you somehow paid back friends and family.

The script changed in the 1980s with the arrival of home loan companies, pioneered by HDFC. Now, instead of borrowing from friends and family, you could take a home loan. The only difference is you have to begin repayment immediately and pay back on a regular basis till eternity (or so it feels). Given the easy availability of home loans, the number of people who can buy their own home has multiplied exponentially. This has resulted in the rent-versus-buy debate arriving on Indian shores as well, as has been agitating financial literates in the West.

 

Reasons to buy

  • When you pay rent, you are paying your landlord’s mortgage or adding equity to his or her bank account. However, when you have a home mortgage, you increase your degree of ownership in your home with every payment. A general rule is that if you intend to stay in your property for at least five to seven years, the costs of purchasing the home are more likely to be offset by accrued equity and increased housing value. In the event that equity in the home grows to more than a 20-to-80 percent loan-to-value ratio, you will be able to borrow against your equity in the home. This can be cautiously used should you need capital to pay for major purchases. If interest rates drop, you can refinance your mortgage at more favorable rates, or, once you’ve paid the entire mortgage off, borrow against the equity in your home to fund major purchases such as a second home or your child’s education.
  • Tax deductions.You can deduct mortgage interest as well as your property taxes. Uncle Sam doesn’t give renters this bonus.
  • Creative control.You like dozens of pictures on the wall? Well, hammer away — they are your walls now. Go ahead and paint them mango! Wish you had another room? Go ahead and add one.
  • Maintenance choices.If you live in a house, you can decide how to approach maintenance, either doing it yourself or picking your own contractor. If you live in a condominium or homeowners’ association, you may pay a monthly fee to have maintenance work covered by the association’s contractors.

 

Reasons to Rent

  • Renting allows you to explore an area before making the longer-term commitment to homeownership. Unless you are certain about a specific neighbourhood, renting allows time for research and discovery.
  • Career uncertainty.If you think you might need to move in the near future, or are mulling job changes that span several areas of town or are located elsewhere in the country, you might want to rent. Buying ties you down to a greater extent.
  • Income uncertainty.If you expect a pay hike or cut in the near future, that can change your borrowing ability as well as impact your ability to pay a mortgage.
  • Bad credit.Creating a history of on-time rental payments can help you build the sort of credit you’ll need to qualify for a mortgage.
  • No maintenance expenses.When a pipe leaks, you don’t head to the store; you head for the telephone and call the landlord.
  • Utilities (sometimes) included.In some instances, the landlord may pay for many utilities such as water, sewer, garbage, and, in some cases, even heat and hot water.

 

Is renting cheaper?

This is not an inconsequential question. Renting or buying cost effectiveness depends on your market, where you choose to live and whether you like to do home improvement and maintenance projects yourself.

Homes cost money: Appliances break, roofs leak, and if you own, you are the lucky soul who gets to pay the bill. If you are renting, landlords pay the plumber and roofer.

That is why many homeowners who have taken out a mortgage in order to buy do so in anticipation of the tax breaks that come with homeownership. Depending on your tax bracket, a first-time purchaser’s tax deductions can heavily subsidize many of the expenses you have poured into your new home.

Also, since a 30-year fixed mortgage comes with an amortization schedule with the highest interest payments coming in the first years of the loan repayment, mortgage holders have been able to claim deductions in the early stages of ownership.

 

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