Download Renting vs Owning

Renting vs. Owning
The Difference Between
Renting and Owning a
Home
1.9.3.G1
Outline
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Introduction
Reasons for making a housing choice
Comparison of Expenses
Renting
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Advantages and disadvantages
Owning
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Advantages and disadvantages
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Introduction
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Housing is the largest personal expenditure
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About 28% (max of 30%) of a person’s gross income (the
amount you make BEFORE taxes are taken from you
paycheck)
Choosing where to live is based upon a person’s goals,
values, needs, and wants
Places to live include:
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House, apartment, condo, mobile home, etc.
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Reasons for Making a
Housing Choice
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Personal and financial goals
Personal values, needs, and wants
Amount of money available for housing costs
Financial resources and readiness
Credit history
Real estate prices
Location preference
Expected length of stay in particular place
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Costs of Renting
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Application Fee
Credit Check Fee
Security deposit
Advance on Rent
Moving
Monthly rent
Utilities – electricity, water, garbage, etc.
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Renter’s insurance
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Parking
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© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Costs of Ownership
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Earnest Money
Application and Credit Check Fees
Inspection Fees
Down payment (one time cost)
Closing costs (one time cost)
Monthly mortgage payments
Utilities – electricity, water, garbage, etc.
Homeowner’s insurance
Real estate property taxes
Maintenance
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Renting
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Rent
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Tenant (renter)
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The cost of using someone else’s property
The person who rents the property
Renters are generally
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People who choose not to own a home
People who cannot afford to own a home
Move often
Just starting out in a new job and has little to spend
Retired couples
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Renting continued
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Landlord
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Owner of the rental property
May perform management duties or hire a property manager
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Property manager - may charge a fee to the landlord to perform the
management tasks
Duties
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May collect rent and deposits, pay utility bills, complete repairs and
maintenance, watch over the property, respond to tenant complaints, assign
new tenants, etc.
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Moving into a Rental
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Upon moving into a new place, people are usually required to
pay a security deposit and sign a lease
Security deposit
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An advance payment to cover anything beyond normal wear and tear on
the unit
Lease
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A legal contract between the tenant and the landlord, specifying the
responsibilities and rights of both parties
Identifies the rent amount, security deposit amount and specifications,
payment for utility bills, late payment penalties, length of lease, eviction
terms, etc.
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Advantages of Renting
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Low move-in costs
Fixed monthly expenses –
predictable housing costs
Easy to move - mobility
Location choices (may be close to
work or school)
Less maintenance and repair work
Fewer responsibilities
May offer extra amenities such as a
tennis court or pool
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Less expensive than home
ownership
May be able to save for other
wants or needs if renting a less
expensive apartment
Other expenses may be included in
rent payment such as electricity,
water, sewer, and/or garbage
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Disadvantages of Renting
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Subject to terms of a lease
Rent may change with little notice
Less privacy and transient
neighbors
Restrictions on noise level, pets,
etc.
Fewer opportunities to upgrade
apartment such as new carpet,
paint, or wallpaper
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When leaving a property, no
equity is returned as it would be if
selling a home
No tax deductions
May lose rental if the property is
sold
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Analyze the following when
considering your housing
choice
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Income – determine both monthly and yearly income…is the income steady
Expenses –
A. Fixed: paid regularly and the amount is basically the same for each payment
B. Flexible: vary in amount and do not occur regularly
Savings – life is full of surprises and savings makes it easier to cope with unplanned
expenses…must save money for a down payment and closing costs…after moving
into a home or apartment savings can be helpful for paying for unexpected repairs
Strengthen Your Finances – make a financial plan…pay yourself first…reduce flexible
spending…limit impulse buying…keep records to know how much money has been
used
Human Resources – investing time, energy and talent into a home can save you
money…buy a fixer-upper…become your own Interior Designer…do your own
plumbing
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Rental Abbreviations
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When looking for housing in the newspaper or on some internet sites, you will notice that apartments and houses are usually described with abbreviations. Below are the
most commonly used abbreviations.
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apt - apartment
a/c - air conditiioning
apls - appliances
b/c - balcony
ct - a bathroom with ceramic tile
crptg - carpeting
dlx - deluxe
english apt - same as a garden apartment
f/a - forced air, new heating and cooling system, will have its own meter
fpl - fireplace
garden apartment - ground level or basement apartment
hdwd fl - hard wood floor
htd - heated
lft - loft, which is a large room, probably a converted warehouse
mstr bdrm - master bedroom
mod - modern
nly dec - newly decorated
pnty - a pantry
sm - small
spcs - spacious
tenant htd - tenant pays for heating
wf - wooden floors
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Text page 152
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© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Affordable Options
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Privately Owned Housing
Public Housing – designed for low-income families, senior
citizens and those with disabilities (built for those that cannot
afford private housing…rent is usually set as a percentage of the
monthly income of the renter…if you make below a certain
amount you qualify)
Subsidized Housing – government helps low-income families
live in private housing by paying part of the rent…payments are
sent directly to the housing owner…the tenants pay what they
can afford and the government pays the rest…families that live
in these units must meet certain income guidelines
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Home Ownership
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Home ownership - the buyer has purchased a housing unit as
property
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Goal of many Americans
A large financial decision
Owning a home is an investment because if a person sells a
home for more than what it was bought for, the person makes
money. This is called equity.
Financial planning and savings can assist a person in planning
for the benefits of home ownership later in life
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Purchasing a Home
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90% of buyers take out a mortgage
– A home loan in which the real estate is the collateral
– Collateral is an item promised to the lender if the borrower does not
pay back the loan, usually the home
Down payment
– Amount of money paid on the home at time of purchase
– Typically 10 – 20% of the purchase price of the home
Recommended purchase price amount an individual should pay for a home
– 28% of their annual household income
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Advantages of Ownership
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Build equity which can be
borrowed against if
necessary
Pride of ownership
Feel more comfortable and
have more privacy
Stable mortgage payments
More room and storage
Improvement of buyer’s
credit rating
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Income tax deductions for
property taxes and mortgage
interest
Potential for property to
increase in value
Free to make home
improvements and have pets
(items typically not allowed in
rentals)
Feeling of belonging
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Disadvantages of
Ownership
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Large down payment
Move-in costs
Insurance costs
Possible for property to
decrease in value
Time, money, and energy
commitment
Repair and maintenance
costs
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Property taxes can raise
substantially
Money is tied up in the
home
May take several months to
sell a home if trying to
relocate
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Mortgage Terms
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Principal – original amount of a loan
Interest – money/fee charged to borrow the money
Amortization – the gradual elimination of the principal of a loan
Equity – the difference between the price a home might sell for and the
market value of the home (if the market value of the home is $150,000 and
the remaining principal on the loan is $100,000 the equity the owner has is
$50,000)
Escrow – money held in trust by a third party until a specified time…such as
taxes and insurance payments are due…at that time the lender withdraws the
money from the escrow account and makes the tax and/or insurance payment
on behalf of the homeowner
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Types of Mortgages
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Conventional – borrower pays fixed interest rate…length of the loan is
usually 15-30 years…good choice when interest rates are very low because the
interest rates remain the same for the length of the loan
Adjustable Rate – interest rate changes after a certain length of time…usually
every 1-5 years…changes in the rate are determined by the terms of the
mortgage…limit/cap on how high or low the rate can go…paid over 15-30
year period of time…usually start with lower interest rates than those with
fixed rates…good choice for people who are not staying in one place for a
long period of time or are not earning enough to afford a conventional loan
Graduated Payment – payments start out low and increase with
time…popular with first time homeowners
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Condominium and Cooperative
Ownership
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Condominiums – person buys a unit in a multifamily dwelling (apartment
building, town house, or du/triplex…person is responsible for home loan
payments, taxes and interior maintenance…also part owners of common
areas (hallways, building exterior and outer grounds) and must share in the
upkeep of these areas…group collects fees to cover upkeep of common areas
and provide services such as trash pickup…owners vote on the important
issues concerning the property.
Cooperatives – allows people to buy shares of stock in a nonprofit
corporation…the corporation owns the property…the number of shares a
person owns is determined by the cost of each unit…some members sit on a
board of directors…board of directors arranges maintenance and services
which are paid for by fees collected from each owner…all owners can approve
or reject the sale of a unit.
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.9.3.G1
Keep In Mind. . .
People are always paying
for a home. It’s just a
matter of whether it is
for themselves or
their landlord.
© Family Economics & Financial Education – Revised April 2005 – Housing Unit – Renting vs. Owning a Home
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona