by Bradley Streeter

Created on: August 05, 2008   Last Updated: April 07, 2012

To many people, owning a home represents the pinnacle of the American Dream. To others, home ownership is the first step to financial security; a large, appreciating asset that has practical use as well. And some look at paying a mortgage as "paying yourself" instead of a landlord. While there are certainly a lot of good reasons to buy a home, there are situations that make renting a better decision than buying. While nobody's individual circumstances are identical, many fall into one of the categories below. If your circumstances resemble one or more of these, perhaps renting is right for you.

Short-term:

The first and most obvious situation in which renting is better than buying is thewhen it is known that you will be living in a certain place for only a short time. While a home is an appreciating asset, appreciation takes place gradually and is subject to short-term market variations. After factoring in the fact that you are likely to pay thousands in closing costs and potentially spend thousands more on initial home improvements, it may take several years for the appreciation to justify the initial investment.

Another consideration is that the first few years of mortgage payments are overwhelmingly applied to interest. After 12 monthly payments of $1,199.10 on a $200,000 mortgage at 6.00%, the balance remains at $197,543.98. Despite nearly $14,000 in payments, the balance has been paid down less than $2,500! This doesn't even include homeowner's and mortgage insurance or real estate taxes, which often add hundreds of dollars to a homeowner's monthly payment.

Even if you can afford to buy, if you know that you're only living in an area for a few years, the wiser investment would be to calculate the difference in rent and a house payment, and put that difference aside in an investment product with higher liquidity.

House-poor:

For those who know they are staying in one place for a while, buying a home doesn't make sense if you truly can't afford it. Even if you've taken the time to write a budget and you know that you can put 50% of your monthly income towards a house payment, it's not likely a good use of your resources. For one, most lenders aren't willing to give a loan to a consumer whose back-end PITI ratio is above 36% (41% for FHA loans). Your back-end PITI ratio is determined by adding all recurring debt payments to the anticipated monthly housing cost (including taxes and insurance), and dividing by your monthly income. Most lenders also require

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