Should you rent or buy a house?

After worrying about resale value, the next thing to consider is the comparison between rental payments and mortgage payments.

What's the real cost?

When prospective homebuyers shop for houses, they usually have a good idea of what the mortgage's principal and interest will cost every month, Williams says. But principal and interest are only part of the equation. Property taxes and homeowner insurance typically add hundreds of dollars to each monthly payment.

The easiest way to estimate property taxes and insurance is to find out what the seller is paying. It's also a good idea to get a rate quote from an insurance company or agent.

In some markets, the rent-or-buy decision is a no-brainer after you have finished this comparison. According to the Census Bureau, 11.1 percent of rental housing units were vacant in the third quarter of 2009. That's the highest rental vacancy rate since the Census began keeping records in 1965, and it implies that landlords are motivated to give good deals to renters.

If buying a house, Williams recommends that you spend no more than about 28 percent to 30 percent of your before-tax income on the monthly house payment, including principal, interest, property taxes, homeowners insurance, mortgage insurance and homeowners or condo association dues. Her recommendation is more conservative than that of the Federal Housing Administration, which limits mortgage payments to 31 percent of income. Fannie Mae and Freddie Mac will sometimes go even higher.

When you own a home, the monthly payment is only the beginning of the costs. You have to pay for maintenance and repairs. If you have a yard, you have to keep it up. More than one homeowner has been shocked by the cost of buying cordless drills, ladders, lawn mowers, rakes and other necessities.

"Seriously ask yourself: How truly handy am I, and what can I afford to have done?" Williams says. Without help and expertise, "that less-expensive fixer-upper is going to continue to be a fixer-upper."

Finally, there's the issue of federal income taxes. You can factor the mortgage interest tax deduction into your housing budget, but remember that lenders disregard the tax deduction when calculating debt-to-income ratios.

Then there's the first-time homebuyer tax credit -- a gift of up to $8,000 from Uncle Sam. Like other money gurus, Williams worries that the first-time homebuyer tax credit could push some people to buy houses before they're ready to own. "Any type of incentive has some positives, but it also has an opportunity to bring people who just aren't prepared," she says. "The worst thing for the homeowner, the community and the mortgage holder is to have the homebuyer fall out the back door -- meaning they could get into the house, but they very quickly fell out of the house."

In danger of foreclosure? Find out if you qualify for the Fannie Mae option to rent back your home.

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