Jack M. Guttentag The Mortgage Professor

Rent or buy?

"I am a 48-year-old divorced female. I have been renting a home for the past 10 years. My friends keep telling me that renting is 'throwing your money away,' but if I buy, my monthly housing costs will probably double. I wonder if, at my age, I would not be better off putting the difference into a retirement account?"

Rent versus buy is a perennial issue -- and a very complicated one.

The decision is not properly made by looking at monthly costs -- there would be few homeowners around if that is all they looked at. Homeowners build equity, which is part of their wealth -- in many cases the major part. The equity can be extracted later in life by selling the house or by taking out a reverse mortgage. Or they can leave it in their estate for others to enjoy, if that is their inclination.

Usually I refer people who ask me about this to calculator 6a on my Web site, which pulls together all the financial costs and benefits associated with any particular rent-versus-buy decision. Of course, this includes equity accumulation as an important benefit.

The calculator approach, however, has serious limitations. One is that an owned house and a rented apartment are not comparable in terms of amenities, location, responsibilities, and even associated lifestyle. Trying to place a dollar value on these is very difficult.

The fact is that most homeowners make the decision to become a homeowner with their gut rather than their mind. Indeed, the decision often resembles the selection of a spouse more than the selection of a financial investment. We have all heard the statement, "I fell in love with that house."

Reading between the lines of your letter, you have never fallen in love with a house and are content with your lifestyle as a renter. So be it. Don't let anyone talk you into doing what your gut tells you not to do.

Pay down credit cards or put more down?

"I'm preparing to purchase a house in February 2008. In preparation, I am saving every month, but I am not sure of the best use of those funds. I have four credit cards with balances equal to about 45 percent of their maximums, and applying my savings to the cards would reduce the balances to about 30 percent. This would raise my FICO score, which is currently 662. Alternatively, I could make the minimum payments on the cards and use my savings to increase the down payment from 3 percent to 5 percent. Which use of my savings would have the greater impact on my borrowing costs?"

Your FICO score is hurt by having four cards with large balances, and paying down the balances would surely raise your score. That it would increase by enough over four months to affect your borrowing costs, however, is very doubtful.

Lenders price mortgages using notch points for many variables, including both FICO scores and down payments. A notch point is a critical point at which your borrowing cost changes. While practices do vary, common notch points for FICO scores are 660 and 720.

If the lender you shop uses these notch points, changes in the score between 660 and 720 won't affect your borrowing costs. Starting with a score of 662, it is very unlikely that you can get to 720 within four months.

Down payment notch points are much more uniform across the market. They are 20 percent, 15 percent, 10 percent, 5 percent, 3 percent, and 0 percent.

Since you can increase your down payment from 3 percent to 5 percent, you can be confident that your borrowing cost will decline. This decline could take the form of a lower mortgage insurance premium, a smaller second mortgage for the amount of the loan over 80 percent of property value, and possibly a lower rate on the second mortgage.

Bottom line: Use your savings for a larger down payment.

Use a reverse mortgage to fix up the house?

"I am 72 yrs old, my mortgage is paid off, and I intend to live with my children in a year or two, at which point I will sell my house. In the meantime, I have some repairs to make and some credit card balances I would like to pay off. I am thinking of taking out a reverse mortgage, then paying it off when I sell. Good idea or not?"

Not. A reverse mortgage is not suitable for raising funds for a short period, because the upfront cost is so high. The appropriate instrument to use for your purpose is a home equity line of credit (HELOC), on which the upfront cost is low -- sometimes zero if you shop carefully.