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Buy or rent

Question: My husband and I can't decide whether or not to buy our first house. We will likely be in any house we buy for at least five years -- there is some possibility we would move after that. We have $50,000 available for down payment, but we also have a 13-year-old and a 10-year-old and are worried about college. We only want to buy a house if it is beneficial to us financially in the long run -- otherwise, we are happy renting. And we hate to say goodbye to that pot of cash that could buy our boys more choices for college (though we also worry about inflation destroying it, and losing this opportunity to buy in a neighborhood we like but usually can't afford to buy in). Should we become homeowners, or not? Laura, Milwaukee, WI

Answer: I really like the way you're asking the question. The answer comes from understanding the trade-offs you'll make to own, and whether it makes sense for you. Owning can make sense. Prices are attractive. The $8,000 first-time homebuyer tax credit is an added incentive if you quality. A home is a lifestyle, too. It's a place where you live with all the benefits that come decorating and landscaping it the way you want.

That said, you want to ignore the two biggest lies in the real estate business. The first is to "buy as much home as you can." It's a recipe for financial trouble. The second is renting is "throwing your money away." That's wrong.

Here are my principle guidelines to weighing the costs and benefits of homeownership:

*Compare the cost of owning vs. renting.

*Buy only if the deal is financially conservative

*Keep the mortgage and financing simple--no piggy-backs, 80/20s, and the like

*Smaller is both smart and socially sustainable

Number crunching will help keep emotions in check. Let's say you calculate that the monthly cost of ownership, taking tax benefits into consideration, is higher than the monthly price of renting for a comparable property. If you buy a home, you're making a big bet that home prices will rise to justify the purchase. But you have a financial cushion if the cost of ownership is less than renting. There are a number of good online calculators, but I tend to gravitate toward the websites www.dinkytown.net and www.hsh.com. Time is critical. Ownership doesn't make sense unless you're confident that your time horizon is at least 5 years. You're in the ballpark from a time perspective.

After you've gone through all this, I would then decide whether ownership is sensible for you. There's nothing wrong about deciding to rent and save.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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