Home Buying Kit For Dummies
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Nearly everyone seems to have an opinion about buying a home. People in the real estate business — including agents, lenders, property inspectors, and other related people — endorse homeownership. Of course, why wouldn’t they? Their livelihoods depend upon it! Therein lies one fundamental problem of nearly all home buying books written by people who have a vested interest in convincing their readers to buy a home.

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Homeownership isn’t for everyone. One of the objectives here is to help you determine whether home buying is right for you.

Advantages of home ownership

Most people should eventually buy homes, but not everyone and not at every point in their lives. To decide whether now’s the time for you to buy, consider the advantages of buying and whether they apply to you.

Owning should be less expensive than renting

You probably didn’t appreciate it growing up, but in addition to the diaper changes, patience during potty training, help with homework, bandaging of bruised knees, and countless meals, your folks made sure that you had a roof over your head. Most people take shelter for granted, unless you don’t have it or are confronted for the first time with paying for it ourselves.

Remember your first apartment when you graduated from college or when your folks finally booted you out? That place probably made you appreciate the good deal you had before — even those cramped college dormitories may have seemed more attractive!But even if you pay several hundred to a thousand dollars or more per month in rent, that expense may not seem so steep if you happen to peek at a home for sale.In most parts of the United States, we’re talking about a big number — $150,000, $225,000, $350,000, or more for the sticker price. (Of course, if you’re a higher-income earner, you may think that you can’t find a habitable place to live for less than a half-million dollars, especially if you live in costly places such as New York City, Boston, Chicago, Los Angeles, or San Francisco.)Here’s a guideline that may change the way you view your seemingly cheap monthly rent. To figure out the price of a home you could buy for approximately the same monthly cost as your current rent, simply do the following calculation:Take your monthly rent and multiply by 200, and you come up with the purchase price of a home.$ _________ per month × 200 = $ _________

Example: $ 1,000 × 200 = $200,000

So, in the preceding example, if you were paying rent of $1,000 per month, you would pay approximately the same amount per month to own a $200,000 home (factoring in modest tax savings). Now your monthly rent doesn’t sound quite so cheap compared with the cost of buying a home, does it? Even more important than the cost today of buying versus renting is the cost in the future. As a renter, your rent is fully exposed to increases in the cost of living, also known as inflation. A reasonable expectation for annual increases in your rent is 4 percent per year. The image below shows what happens to a $1,000 monthly rent at just 4 percent annual rental inflation.

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When you’re in your 20s or 30s, you may not be thinking or caring about your golden years, but look what happens to your rent over the decades ahead with just modest inflation! Then remember that paying $1,000 rent per month now is the equivalent of buying a home for $200,000. Well, in 40 years, with 4 percent inflation per year, your $1,000-per-month rent will balloon to $4,800 per month. That’s like buying a house for $960,000!

The example reflects $1,000 for rent to show you what happens to that rent with a modest 4 percent annual rate of inflation. To see what may happen to your current rent at that rate of inflation (as well as at a slightly higher one), simply complete the table below.
Figuring Future Rent
Your Current Monthly Rent Multiplication Factor to Determine Rent in Future Years at 4 Percent Annual Inflation Rate Projected Future Rent
$__________ × 1.48 = $___________ in 10 years
$__________ × 2.19 = $___________ in 20 years
$__________ × 3.24 = $___________ in 30 years
$__________ × 4.80 = $___________ in 40 years
$__________ × 7.11 = $___________ in 50 years
$__________ × 10.52 = $___________ in 60 years
Your Current Monthly Rent Multiplication Factor to Determine Rent in Future Years at 6 Percent Annual Inflation Rate Projected Future Rent
$__________ × 1.79 = $___________ in 10 years
$__________ × 3.21 = $___________ in 20 years
$__________ × 5.74 = $___________ in 30 years
$__________ × 10.29 = $___________ in 40 years
$__________ × 18.42 = $___________ in 50 years
$__________ × 32.99 = $___________ in 60 years
If you’re middle-aged or retired, you may not plan on having 40 to 60 years ahead of you. On the other hand, don’t underestimate how many more years of housing you’ll need. U.S. health statistics indicate that at age 50, you have a life expectancy of 30+ more years, and at age 65, 20+ more years (women on average tend to live a few years longer). Although the cost of purchasing a home generally increases over the years, after you purchase a home, the bulk of your housing costs aren’t exposed to inflation if you use a fixed-rate mortgage to finance the purchase.

A fixed-rate mortgage locks your mortgage payment in at a fixed amount (as opposed to an adjustable-rate mortgage payment that fluctuates in value with changes in interest rates). Therefore, only the comparatively smaller property taxes, insurance, and maintenance expenses will increase over time with inflation.

You’re always going to need a place to live. And over the long term, inflation has almost always been around. Even if you must stretch a little to buy a home today, in the decades ahead, you’ll be glad you did. The financial danger with renting long term is that all your housing costs (rent) increase over time. You shouldn’t buy just because of inflation, but if you’re not going to buy, you should be careful to plan your finances accordingly.

You can make your house your own

Think back to all the places you ever rented, including the rental in which you may currently be living. For each unit, make a list of the things you really didn’t like that you would have changed if the property were yours: ugly carpeting, yucky exterior paint job, outdated appliances that didn’t work well, and so on.

Although some tenants actually do some work on their own apartments, it’s not typically endorsed because it takes your money and time but financially benefits the building’s owner. If, through persistence and nagging, you can get your landlord to make the improvements and repairs at her expense, great! Otherwise, you’re out of luck or cash!When you own your own place, however, you can do whatever you want to it. Want hardwood floors instead of ugly, green shag carpeting? Tear it out. Love neon-orange carpeting and pink exterior paint? You can add it!In your zest and enthusiasm to buy a home and make it your own, be careful of two things:
  • Don’t make the place too weird. You’ll probably want or need to sell your home someday, and the more outrageous you make it, the fewer buyers it will appeal to — and the lower the price it will likely fetch. If you don’t mind throwing money away or are convinced that you can find a buyer with similarly (ahem) sophisticated tastes, be as unusual as you want. If you do make improvements, focus on those that add value: a deck addition for an outdoor living area, updated kitchens and bathrooms, and so on.
  • Beware of running yourself into financial ruin. Changing, improving, remodeling, or whatever you want to call it costs money. Many home buyers who neglect other important financial goals (such as saving for retirement and their kids’ college costs) in order to endlessly renovate their homes. Others rack up significant debts that hang like financial weights over their heads. In the worst cases, homes become money pits that cause owners to build up high-interest consumer debt as a prelude to bankruptcy or foreclosure.

You avoid unpleasant landlords

A final (and not inconsequential) benefit of owning your own home is that you don’t have to subject yourself to the whims of an evil landlord. Much is made among real estate investors of the challenges of finding good tenants. As a tenant, perhaps you’ve already discovered that finding a good landlord isn’t easy, either. The fundamental problem with some landlords is that they’re slow to fix problems and make improvements. The best (and smartest) landlords realize that keeping the building shipshape helps attract and keep good tenants and maximizes rents and profits. But to some landlords, maximizing profits means being stingy with repairs and improvements. When you own your home, the good news is that you’re generally in control — you can get your stopped-up toilet fixed or your ugly walls painted whenever and however you like. No more hassling with unresponsive, obnoxious landlords.

The bad news is that you’re responsible for paying for and ensuring completion of the work. Even if you hire someone else to do it, you still must find competent contractors and oversee their work, neither of which is an easy responsibility.Another risk of renting is that landlords may decide to sell the building and put you out on the street. You should ask your prospective landlords whether they have plans to sell. Some landlords won’t give you a truthful answer, but the question is worth asking if this issue is a concern to you. One way to avoid being jilted by a wayward landlord is to request that the lease contract guarantee you the right to renew your annual lease for a certain number of years, even with a change in building ownership. Unless landlords are planning on selling, and perhaps want to be able to boot you out, they should be delighted with a request that shows you’re interested in staying a while. Also, by knowing if and when a landlord desires to sell, you may be able to be the buyer!

Advantages of renting your home

Buying and owning a home throughout most of your adult life makes good financial and personal sense for most people — but not all people and not at all times. Renting works better for some people. The benefits of renting are many:
  • Simplicity: Yes, searching for a rental unit that meets your needs can take more than a few days (especially if you’re in a tight rental market), but it should be a heck of a lot easier than finding a place to buy. When you buy, you must line up financing, conduct inspections, and deal with myriad other issues that renters never have to face. When you do it right, finding and buying a good home can be a time-consuming pain in the posterior.
  • Convenience: After you find and move into your rental, your landlord is responsible for the never-ending task of property maintenance and upkeep. Buildings and appliances age, and bad stuff happens: Fuses blow, plumbing backs up, heaters break in the middle of winter, roofs spring leaks during record-breaking rainfalls, trees come crashing down during windstorms. The list goes on and on and on. As a renter, you can kick back in the old recliner with your feet up, a glass of wine in one hand and the remote control in the other, and say, “Ahhhhh, the joys of not being part of the landed gentry!”
  • Flexibility: If you’re the footloose and fancy-free type, you dislike feeling tied down. With a rental, as long as your lease allows (and most leases don’t run longer than a year), you can move on. As a homeowner, if you want to move, you must deal with the significant chores of selling your home or finding a tenant to rent it.
  • Increased liquidity: Unless you’re the beneficiary of a large inheritance or work at a high-paying job, you’ll probably be financially stretched when you buy your first home. Coming up with the down payment and closing costs usually cleans out most people’s financial reserves. In addition, when you buy a home, you must meet your monthly mortgage payments, property taxes, insurance, and maintenance and repair expenses. As a renter, you can keep your extra cash to yourself, and budgeting is also easier without the upkeep-expense surprises that homeowners enjoy, such as the sudden urge to replace a leaking roof or old furnace. You don’t need to buy a home to cut your taxes. Should you have access to a retirement account such as a 401(k), 403(b), or SEP-IRA plan, you can slash your taxes while you save and invest your extra cash as a renter. So saving on taxes shouldn’t be the sole motivation for you to buy a home.
  • Better diversification: Many homeowners who are financially stretched have the bulk of their wealth tied up in their homes. As a renter, you can invest your money in a variety of sound investments, such as stocks, bonds, and perhaps your own small business. You can even invest a small amount of money in real estate through stocks or mutual funds if you want. Over the long term, the stock market has produced comparable rates of return to investing in the real estate market.
  • Maybe lower cost: If you live in an area where home prices have rocketed ahead much faster than rental rates, real estate may be overpriced and not a good buy.
Renting should also be cheaper than buying if you expect to move soon. Buying and selling property costs big bucks. With real estate agent commissions, loan fees, title insurance, inspections, and all sorts of other costs, your property must appreciate approximately 15 percent just for you to break even and recoup these costs. Therefore, buying property that you don’t expect to hold onto for at least three (and preferably five or more) years doesn’t make much economic sense. Although you may sometimes experience appreciation in excess of 15 percent over a year or two, most of the time, you won’t. If you’re counting on such high appreciation, you’re setting yourself up for disappointment.

The pitfalls of the rent-versus-buy decision

When you’re considering purchasing a home, you can do lots of reflecting, crunch plenty of numbers, and conduct copious research to help you with your decision. In reality, many people are tempted to jump into making a decision about buying or continuing to rent without setting all their ducks in a row. At a minimum, this information should help keep you from making common costly mistakes.

Renting because it seems cheaper

When you go out to look at homes on the market today, the sticker prices are typically in the hundreds of thousands of dollars. Your monthly rent seems dirt-cheap by comparison. You must compare the monthly cost of homeownership with the monthly cost of renting. And you must factor in the tax savings you’ll realize from homeownership tax deductions. But you must also think about the future. Just as your educational training affects your career prospects and income-earning ability for years to come, your rent-versus-buy decision affects your housing costs — not just this year, but also for years and decades to come.

Fretting too much over job security

Being insecure about your job is natural. Most people are — even corporate executives, superstar athletes, and movie stars. And buying a home seems like such a permanent thing to do. Job-loss fears can easily make you feel a financial noose tightening around your neck when you sit down to sign a contract to purchase a home.

Although a few people have real reasons to worry about losing their jobs, the reality is that the vast majority of people shouldn’t worry about job loss. This doesn’t mean that you can’t lose your job — almost anyone can, in reality. Just remember that within a reasonable time, your skills and abilities will allow you to land back on your feet in a new, comparable position. We’re not career experts, but we’ve witnessed many folks bounce back in just this way.

When losing your job is a high likelihood, and especially if you’d have to relocate for a new job, consider postponing the purchase of a home until your employment situation stabilizes. (If you haven’t demonstrated a recent history of stable employment, most mortgage lenders won’t want to lend you money anyway.) When you must move to find an acceptable or desirable job, selling your home and then buying another one can cost you thousands, if not tens of thousands, of dollars in transaction fees.

Buying when you expect to move soon

People move for many reasons other than job loss. You may want to move soon to advance your career, to be nearer to (or farther from!) relatives, to try living somewhere new, or just to get away from someplace old.

Unless you’re planning to hold onto your home and convert it to a rental when you move, buying a home rarely makes sound financial sense when you expect to move within three years. Ideally, stay put for at least five years.

Succumbing to pushy salespeople

When you buy a house, you’re the one who’ll be coming home to it day after day — and you’re the one on the hook for all the expenses. Don’t ever forget these facts when you plunge into the thick of possibly purchasing a home. If you have lingering doubts about buying a home, apply the brakes. Many people involved in home-buying transactions have a vested interest in getting you to buy. They may push you to buy sooner (and buy more) than you intend to or can afford, given your other financial goals and obligations. The reasons: Many people who make their living in the real estate trade get paid only if and when you buy, and the size of their earnings depends upon how much you spend.

Ignoring logistics

Sometimes, when looking at homes, you can lose your perspective on big-picture issues. After months of searching, Frederick finally found a home that met his needs for both space and cost. He bought the home and moved in on a Saturday. Come Monday morning, Frederick hopped in his car and spent the next hour commuting.

At the end of his workday, it was the same thing coming home. He was tired and grumpy when he arrived home Monday evening, and after making dinner for himself, he soon had to hit the hay to rise early enough to do it all over again on Tuesday.Initially, Frederick hoped that the trying traffic was an aberration that would go away — but no such luck. In fact, on many days, his commute was worse than an hour each way. Frederick grew to hate his commute, his job, and his new home. When you buy a home, you’re also buying the commute, the neighborhood, its amenities, and all the other stuff that comes along for the literal and figurative ride. Understand these issues before you buy. In the end, after 18 months of commuter purgatory, Frederick sold his home and went back to renting much closer to his job. Forgetting to consider what the commute from a home to his job would entail was an expensive lesson for Frederick. Don’t make the same mistake Frederick made; take your time and consider all the important factors about the home you’re thinking about purchasing.


Many first-time home buyers discover that their desires outstrip their budgets. Nelson and his wife, Laura, had good jobs and together made in excess of $150,000 per year. They got used to buying what they desired — they ate at fancy restaurants, took luxury vacations, and otherwise indulged themselves.

When it came time to purchase a home, they spent the maximum amount and borrowed the maximum amount that the mortgage person told them they could. After the home purchase, Laura got pregnant and eventually left her job to spend more time at home.With the high homeownership expenses, kid costs, and reduced household income, Nelson and Laura soon found themselves struggling to pay their monthly bills and started accumulating significant credit-card debts. Ultimately, they ended up filing bankruptcy. Either you own the home, or it owns you. Get your finances in order and understand how much you can truly afford to spend on a home before you buy.


Remember in the story Goldilocks and the Three Bears how Goldilocks had difficulty finding porridge to her liking? In one case, it was too cold, and in another, too hot. Well, just as you can overbuy when selecting a home, you can underbuy. That’s what Nathan and Rebecca did when they bought their first home. They believed in living within their means — a good thing — but they took it to an extreme.

Nathan and Rebecca bought a home whose cost was far below the maximum amount they could have afforded. They borrowed $70,000 when they could have afforded to borrow three times that amount. They knew when they bought the home that they’d want to move to a bigger house within just a few years. Although this made the real estate agents and lenders happy, all the costs of buying and then selling soon after gobbled a huge chunk of Nathan and Rebecca’s original down payment.

Buying because it’s a grown-up thing to do

Peer pressure can be subtle or explicit. Some people even impose pressure on themselves. Buying a home is a major milestone and a tangible display of financial maturity and success. If your friends, siblings, and co-workers all seem to be homeowners, you may sometimes feel as though you’re being a tad juvenile by not jumping on the same train.

Everyone has different needs, but not everyone should own a home, and certainly not at every point in his adult life. Besides, although they may never admit it, some homeowning friends and colleagues are jealous of you and other financially footloose and fancy-free renters.A study even supports the notion that the life of a typical renter is, in some respects, better than that of the average homeowner. Peter Rossi and Eleanor Weber of the University of Massachusetts Social and Demographic Research Institute conducted a survey of thousands of people. Here are some of their findings:
  • Homeowners are less social, on average, than renters — spending less time with friends, neighbors, and co-workers.
  • Homeowners spend more time on household chores.
  • Perhaps for the preceding reasons, renters have more sex and less marital discord and cope better with parenting than homeowners do!

Buying because you’re afraid that escalating prices will lock you out

From time to time, particular local real estate markets experience rapidly escalating prices. During such times, some prospective buyers panic, often with encouragement from those with a vested interest in converting prospective renters to buyers. Escalating housing prices make some renters feel left out of the party. Booming housing prices get all sorts of publicity, including from gloating homeowners clucking over their equity. Never in the history of the real estate business have prices risen so high as to price vast numbers of people out of the market. In fact, patient buyers who can wait out a market that has increased sharply in value are often rewarded with steadying and, in some cases, declining prices (witness what happened in the late 2000s). Although you won’t be locked out of the market forever, you should keep in mind that if you postpone buying for many years, you’ll likely be able to buy less home for your money thanks to home prices increasing faster than the rate of inflation.

Misunderstanding what you can afford

When you make a major decision, be it personal or financial, it’s perfectly natural and human to feel uncomfortable if you’re flying by the seat of your pants and don’t have enough background. With a home purchase, if you haven’t examined your overall financial situation and goals, you’re just guessing how much you should be spending on a home.

Again, the vested-interest folks won’t generally bring this issue to your attention — partly because of their agendas and motivations, but also because it’s not what they’re trained and expert at doing. Look in the mirror to see the person who can help you with these important issues.

About This Article

This article is from the book:

About the book authors:

Eric Tyson, MBA, has been a personal finance writer, lecturer, and counselor for the past 25+ years. He is the author or coauthor of numerous For Dummies bestsellers on personal finance, investing, and home buying.

Bob Nelson, PhD, is considered one of the world’s leading experts on employee engagement, recognition, and rewards. He is president of Nelson Motivation, Inc., a management training and consulting company that helps organizations improve their administration practices, programs, and systems.

Eric Tyson, MBA, is the author of Investing For Dummies, Personal Finance For Dummies, and Investing in Your 20s and 30s For Dummies. Ray Brown, a real estate professional for more than 40 years, is the best-selling co-author of Home Buying For Dummies.

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