Introduction
The need to understand personal finance has gained popularity in recent times. This is due to the desire by many people to make informed decisions thus avoiding consequences occasioned by poor and untimely decisions on personal finance management.
Garman and Forgue (2007, p.4) define personal finance as the area of study that deals with the management of financial resources at the individual and family level. Personal finance is involved in explaining the culture of saving, spending and investing observed in people and the reasons influencing these initiatives. According to Garman and Forgue (2007, p.4), areas covered in personal finance include the management of cash, investments, tax and risks associated with personal financial initiatives.
Other areas include career advancement, budgeting process, retirement and estate management. There is the need to instill financial literacy and responsibility on the part of the individual and his/her family thus assisting in making of wise and informed decisions on finance management. Estate management and acquisition of homes are important things that every person must learn before committing their money in the process. In light of this, an in-depth assessment of the process of buying, renting and selling a home and the impact the knowledge on home buying has on an individual is worth of exploration.
Analysis of the topic
The process of acquiring a good home is lengthy and complex thus requiring a lot of patience and time. In order to have a good bargain, one must take into account the long-term implications before deciding to rent or buy a home. Garman and Forgue (2007, p. 260) noted that buying a home requires a clear understanding of the financial implications, up-front and monthly costs, the steps involved and the various ways of financing. The clear understanding of the above factors helps the individual to make an informed decision of whether to buy or rent a home.
Many people find themselves in a dilemma before they make the final decision of buying or renting a home. The decision is mostly driven by preferences of what the buyer can afford to pay monthly towards the cost of rent or mortgage. It is less expensive to rent than buy in short term due to the reasonable cost of rent.
However, analysts argue that renting is very expensive in the long term due to the amount lost on taxes and failure to benefit on appreciation of the homes. Buying allows an individual to benefit from income tax reduction caused by deductions of mortgage interest and property taxes. However, the tenants are better off when it comes to cash flow since they pay less monthly charges compared to the buyers (Walker, 1999; Garman and Forgue, 2007, p.231)
Rented housing is usually associated with costs such as rent, damage and security deposit and related expenses accrued in maintenance. Renting in the United States take the form of leasehold whereby the landlord and the tenants have specific rights that safeguard their interests. Buyers are mainly offered variety of choices such as single dwelling units, condominiums and cooperatives. Condominiums and cooperatives are mainly multistoried structures where the buyers own a proportionate share of the structure (Garman and Forgue, 2007, p.231)
The buyers understanding of the costs to foot monthly is as vital as buying the home itself. This is because failure to pay the installments may lead to the cancellation of the mortgage. Other charges and their implications must be taken into account during the process assessed to shed a clear picture of the buyer’s liabilities upfront and at the closing stages. Monthly costs on the new home can account for about 40% of the buyer’s income. This is mostly through the addition of private mortgage and homeowners insurance. The property taxes may also add the cost of the principal and the interest leading to an extra 20% of the principal (Garman and Forgue, 2007).
This topic also delves on the steps taken during the home buying process. The first step requires the buyer to source for funds to finance the deal taking into consideration his/her credit worth. The buyer then searches for a suitable home after knowing the extent of mortgage which is based on the credit worthiness. The buyer then applies for a mortgage after negotiating the purchase offer and agreeing to other terms.
The buyer obtains the loan and sorts out the legal consideration during the closing stage. Once this is completed, the buyer is free to sign the contract. This topic also looks into the various ways of funding the deal with special interest to modalities of calculating the interest rates and the monthly payments. The merits and demerits of each method are discussed with a view of helping the buyers reach a viable conclusion.
The considerations to be taken before choosing the best process of selling the house are also discussed. The seller should take into account the transaction costs so that he/she does not incur a loss. The process of buying and selling a home should b consultative to avert losses occasioned by unforeseen costs (Garman and Forgue, 2007)
Impact of the knowledge of home buying and selling to my life
Home buying and selling is an inevitable process that all individuals must encounter in their life. The knowledge on this matter is very helpful in making the appropriate decisions and actions. The cost implications of renting and buying a home acts as guides on the path the young people will take in the United States (Garman and Forgue, 2007).
The topic of buying a home has instilled a lot of knowledge in me particularly on the process of acquiring a home. This has enhanced me to know the implications of renting versus buying a home. This is through the comparison of the overall cost in the short term and long term. The savings made by the buyer in the long term will make me prefer acquiring to renting a home.
Although it seems cheaper to live in a rented house due to the limited liabilities, it actually costs much more in the long run due to loss in income taxes. The buyer pays less income tax than the tenants due to mortgage and property tax deductions made to the gross taxable income. This enables the buyer to save on the monthly payments while also benefiting from appreciation in the cost of the home (Garman and Forgue, 2007).
My opinion on the acquisition of condominium and cooperatives has improved largely. The ownership structure and the lower cost compared to single dwelling units makes them viable structures especially in urban centers where there are space constraints. This knowledge has helped me develop entrepreneurship desires to construct housing units to cash on the advantages enjoyed by the landlords over the tenants. This is also driven by the fact that the government gives incentives to developers through tax waivers. Generally, it is cost effective to build or buy a home than rent (Walker, 1999).
The knowledge on the various options of financing home buying and the process of accessing them has helped me in knowing the best option that will ensure the minimal cost is incurred. The information on the confounding factors that influence the acquisition of mortgages and their effect on the final cost is important in helping me improve my creditworthiness before applying for a mortgage. A better credit worthiness translates to a bigger mortgage package from the banks.
The knowledge on mortgage insurance is also useful in ensuring that I comply with the laid down standards so that I can benefit from insurance services from the federal government. This insurance package is less expensive compared to the private mortgage insurance. The calculation of the mortgage interests and the various options of lender arrangements have bolstered my knowledge. This information is imperative in enabling me choose the best type of arrangement and payment mode without necessarily having to tap equity to clear or service other loans (Garman and Forgue, 2007).
The information would also enhance my capabilities of deducing the amount of money that is required upfront and the monthly fees towards servicing the mortgages. This would also enable me to know the categories of taxes and charges payable annually thus allowing me to set aside a portion of the charges each month before submitting them to the relevant government agencies at the end of the year.
Conclusion
It is important to understand the short-term and long-term implications before renting or buying a house. The process of acquiring a home is lengthy and requires a cautious approach. The information in this topic has helped build my capacity on home buying and financing. It’s important for buyers to weigh the options at their disposal before buying a home.
Reference
Garman, T., & Forgue, R. (2007). Personal Finance. (9th Edition). London: Cengage Learning.
Walker, A. (1999). Buying a House: How to Find, Choose, Buy and Pay for Your Own Home. (1st Ed.). London: How to Books.