Wednesday, 10 April 2013

How do I Know if it's Better to Buy a Home or Continue Renting?

Perhaps one of the easiest ways to determine if it’s better to buy or rent is to sit down and calculate the financial advantages of owning versus renting. This is commonly done online with a ‘‘rent versus buy’’ calculator found on the Web.

These calculators compare your current or probable rent situation with a projected home ownership number. They’re easy to find. I ran a Google search for the term ‘‘mortgage and calculator’’ and retrieved 6,100,000 websites that had those two terms in combination.

But the kicker is that these calculators rarely will tell you, ‘‘No, it’s not a good idea to buy.’’ That’s because of the tax benefits of home ownership. The interest and property taxes associated with a mortgage are generally tax deductible. You can deduct them from your gross income when you file your taxes. With rent, you can’t.

Yeah, I know. When you’re a renter you don’t pay property taxes or mortgage payments. Instead you give money to someone else for the privilege of living there. But you can’t write off your rent. It’s just that. Rent.

When might a ‘‘rent versus buy’’ calculator suggest it’s better to rent? When you intend to own your next home for only a year or so.

Buying a home incurs other expenses, such as money for the down payment, property taxes, and hazard insurance (which is much higher than a renter’s policy). Many apartment complexes pay your electric bills along with water and other utilities. When you own, you pay all these expenses. Owning a home with all its tax benefits doesn’t outweigh the acquisition costs to buy the home if you’re only going to own it for a short period. Short term, rent.

Longer term, buy. Are your rent payments the same or less than what a mortgage payment would be? Depending upon where you live, they may be the same. Especially if interest rates are relatively low.

Let’s say you’re renting a nice 3,000-square-foot, three-bedroom home close to schools in a friendly neighborhood. You might be paying $1,800 each month in rent. A similar three-bedroom home might cost $150,000. If you put 5 percent down to buy the home, your monthly house payment, including taxes and insurance, would be close to $1,200 using a 30-year fixed rate at 7.00 percent.

If rent payments in the area in which you want to buy are near what a mortgage payment would be, it makes sense to buy. If you can save $600 per month and you also get to write off the mortgage interest and property taxes, then it’s truly a no-brainer.

Another reason buying is generally better than renting is simply a matter of appreciation and equity. When you rent and property values increase, your landlord will probably raise your rent again.

And, of course, each time you make a rent payment you’re not increasing your equity in anything; you’re just helping your landlord increase his stake in your house or apartment. I’ll give you an example.

Your rent is currently $1,000 per month, and you’re thinking about buying a $150,000 home. If you put 20 percent down and borrow $120,000 at 7.00 percent on a 30-year fixed rate, your principal and interest payment are about $800 a month. Let’s also assume that property values are increasing in your area by about 5 percent per year. What’s the situation after two years?

If you rented, you paid someone else $24,000. But if you owned and itemized your federal income taxes, you likely deducted over $16,600 in mortgage interest on your income taxes. You also paid your loan down by over $2,500 while at the same time increasing your equity position in the house by nearly $18,000.

Now you see why those calculators always tell you to buy a home.
Through all of these calculations, remember the real reason for buying: You buy a home because you want to. Because you like the place. It’s your home. A home is one of the largest single financial commitments someone can make. And while I agree with that statement, let’s not go overboard here. Buy a house because you want to, not because some calculator told you so.


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