Chapter 12 – Houses and Apartments

The largest single expense a household faces is usually the cost of shelter. This chapter discusses how to find a place to live.

Location, location, location

The first step of finding housing is to decide where you are going to live. This is a highly personal decision that depends on your personal preferences and life situation. There certainly is not a universal right or wrong answer to this question! Some people will prefer a downtown location. Others might prefer a small town in the country. There truly is no place that is "better" or "worse". So find the area that is best for your situation.

There are a few common questions to keep in mind as you search for housing. Consider not just the size of your family, but its composition as well. How close is the nearest school for your children? How long will your commute be? How long will your spouse’s commute be? Are you comfortable raising your children in a downtown loft, or do you prefer the wide open spaces of the suburbs?

Knowing where you want to live will help you narrow down the possibilities for what you’re going to live in. A traditional single family dwelling or a mobile home may not be an option in a downtown setting, and a townhome may be all you can afford in an expensive neighborhood.

Rent Vs. Buy

Contrary to what you may have heard, paying rent is not a waste of money. There are many distinct advantages to renting that make it a very good choice for many households. Renting is almost always cheaper than buying a home primarily because when you rent you don’t have to pay property taxes, pay for insurance on the property, or pay to maintain the property. Renting also does not require a large down payment and it allows a much greater degree of mobility because you can simply move whenever your lease is up. There is also less responsibility for the renter because they have no liability for the property and they don’t have to spend their time or money on house maintenance and repairs.

There are advantages and disadvantages of owning a home as well. The opportunity for equity appreciation is the largest financial benefit. Home equity is the value of the home over and above the amount that is owed. For example, if you owe $240,000 on a home that is currently worth $300,000, then you would have $300,000 - $240,000 = $60,000 in home equity.

Because a home is an asset, it has inherent value. That value can go up or it can go down. Homes usually appreciate and go up in value over time if they are well maintained. This means that the value of your home equity is likely to increase over time. The growing value of home equity over time is the primary advantage of buying over renting. Eventually, the equity in your home could grow to become your largest asset. That asset can, in turn, provide tremendous value to you when you retire. For example, if the mortgage is paid off you can stay in your home by simply paying the property taxes. This will greatly reduce how much money you will need to save to fund your lifestyle in retirement.

There are also psychological benefits to owning a home. There is an intangible satisfaction to owning your own home and being able to customize it to your specific needs.

There are also tax advantages unique to homeownership. The interest you pay on your mortgage and the taxes you pay on the property are deductible. This makes the mortgage less expensive than it would otherwise be. As an investment, your home is also efficient because no capital gains taxes have to be paid on its appreciation when you sell it. You can also claim tax credits if you install energy efficient home improvements.

On the downside, buying a home requires you to accumulate enough cash to make a large down payment and to pay substantial closing costs in order to buy. Additionally, moving is more difficult and more costly when you own a home, and home maintenance takes a lot of time and responsibility.

Tenant Rights

When you rent a property you should understand your rights and responsibilities. Be sure to read your lease carefully. It is a legal contract by which you and your landlord are both bound. Be sure to check the terms of the agreement, including the amount of your rent and when its due, the length of the lease agreement, information regarding the security deposit, and subleasing and renewal options.

You also have rights as a tenant. You have a right to be free from harassment, to have the property maintained according to local habitability standards, and the right to hold your landlord to the performance of their duties. In other words, your landlord must provide a reasonably habitable place for you to live.

When to buy

Many people wonder about when it would be the right time for them to buy a house. Three criteria determine if you are ready for homeownership.

1. You should have about 5% to 20% of the sales price saved up for paying closing costs and making your down payment. Mortgages are complex legal documents. this means they are expensive to create. You need to be prepared to pay these expenses if you wish to buy a home.

2. You need a degree of stability in your employment and location where you live. If you think you may need to move within 5-7 years, then it may not be a good idea to buy a house. The clsoing costs of a mortgage are too high to make it feasible to move to a new house every couple of years.

3. Lastly, you need to have enough resources to sustain home ownership. This means that you need money each month in addition to your mortgage payment that you can consistently use to pay for taxes, insurance, and home maintenance. These expenses can be significant – up to 30% of your total monthly payment can be from taxes and property insurance alone! You will need to do some research into how much these expenses cost in your area.

Definitions:

Lease: a legal contract by which you and your landlord are bound

Home Equity: the value of your home above (or below) the amount that you still owe on the mortgage

Appreciation: when the value of an asset goes up