Many renters will hear from their friends who own homes that owning is the only way to go. Real estate agents, though happy to help a client find a place to rent, will often come out with the canned "why rent when you can buy?"
Here are some reasons why renting can be preferable to buying:
- Buying includes the addition of a large liability to personal holdings
- Tax benefits often do not offset costs
- There is a lawful allowance that allows lenders to offer borrowers more than they should take
- Real estate belongs to the government
A Home is an Asset That Comes With a Liability
For many, a home is the biggest asset they own. What they fail to realize is that it's also the biggest liability as well. A $150,000 home bought with a 20% down payment leaves a $120,000 mortgage. According to bankrate.com, a 30-year mortgage of this amount at 5.75% would result in the borrower paying over $252,000, more than twice the amount loaned leading to the origin of the word mortgage.
The word mortgage, according to dictionary.com, originated between 1350-1400. Its root comes from the Latin word mortus, meaning dead. Thus a mortgage is intended to be an engagement until death, explaining the incredible long term cost and the recent advertising of the 40-year loan.
Doesn't Owning a Home Give Great Tax Benefits?
The tax benefits of owning a home are almost always associated with money spent for which a fraction is returned. For example, a home owner with a mortgage of $120,000 at 5.75% will pay approximately $700 in principle and interest. Over the course of the first year of the mortgage nearly $7,000 will go to interest.
If the home owner earned $50,000 that year, then he would only pay taxes on $43,000, meriting a refund of $1,750, or 25% of $7,000. The refund would not likely cover the insurance and maintenance costs of the home, crossing off the possibility of it subsidizing improvements.
Lenders are Legally Allowed to Bury Their Clients in Debt
When renting an apartment, the general rule of thumb is that a renter must earn their rent money in one week, or earn four times their payment. This ensures that the landlord will receive his money from someone who can afford to pay it and is an excellent practice to follow in mortgage payments. Lenders, however, do not agree.
According to the Mortgage Reference Library at brokeroutpost.com many lenders are allowing their clients to borrow up to a 50% debt to income ratio (DTI). This means that if a person earns $50,000 a year before taxes a lender will encourage him by way of qualification to put $25,000 a year into long term debt. The result is that the borrower will be left with less than $15,000 in discretionary income to pay for groceries, car, life, health and dental insurance. And then there is the possible need for clothes, which may suffer in some seasons as the price of energy fluctuates.
Additionally, a home owner can be forced from their home by the government.
What Does "Real Estate" Mean
When home owners achieve the dream of purchasing a piece of property it is called a real estate transaction. If one was to think about the term real estate they would most likely conclude that it means an estate that is actual, or real.
Returning to words and their origins best selling author Robert Kiyosaki explains in his Rich Dad series that the world real in real estate comes from the Latin word royal, meaning that the land belongs to the King or the government. This is the reason home owners pay taxes to the government, which then uses the raised funds to make improvements as they see fit, rather than home owners paying taxes for community improvements at their own discretion.
This is also the reason the government can enforce eminent domain upon a property owner without his or her permission. According to the law website nolo.com, eminent domain falls under the Fifth Amendment of the US Constitution granting the government permission to take a piece of property for the public good, such as a highway, park, or hospital, for which the owner will be compensated fair market value.
In the end, home ownership can be extremely costly, and buyers should be aware of and weigh all of the positives and negatives before buying.
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