Buying vs. Renting
If you are like most Americans, owning your own home is a part of the American Dream, and the starting point for American families to accumulate wealth. Homeownership provides shelter and security to families, and fosters involvement in community life as well as participation in democratic institutions.
Given record levels of homeownership in the United States, owning a home of your own appears to be the clearest sign of achieving the American Dream.
Homeownership provides important social, as well as economic, benefits. It is the cornerstone of a healthy community and the basis for positive community involvement.
When you are renting a property, you are waving good-bye to your money each month. Renting a home does not provide tax advantages to the renter; any advantages go to the landlord or property owner.
When considering your options, you should be aware of the benefits of home ownership.
Tax breaks. The U.S. Tax Code lets you deduct the interest you pay on your mortgage, property taxes you pay, as well as, some of the cost involved in purchasing your home.
Equity. Money paid for rent is money that you will never see again, but mortgage payments let you build equity ownership interest in your home.
Savings. Building equity in your home is a ready-made savings plan. When you sell, you can generally take up to $250,000 ($500,000 for a married couple) as gain without owning any federal income tax.
Predictability. Unlike rent, your mortgage payments do not go up over the years, so your housing costs may actually decline, as you own the house longer. However, keep in mind that property taxes and insurance costs will rise.
Freedom. The home is yours. You can decorate any way you want and be able to benefit from your investment for as long as you own your home.
Stability. Remaining in one neighborhood for several years gives you a chance to participate in community activities, lets you and your family establish lasting friendships, and offers your children the benefit of educational continuity.
Rent-to-own deals: Questions buyers should ask
- How much of the rent is going to the down payment?
- How locked in are you if you change your mind?
- What will it cost you to get out of the deal?
- How long will it take to accumulate enough of a down payment that you are likely to qualify for a mortgage?
Do the math
Visit www.fha.gov for an interactive Rent vs. Buy Calculator to help you compare the costs and benefits of renting vs. buying. To access this tool go to www.fha.gov. Under the section labeled “Business Tool” click on the “Mortgage Calculator” link and then select the “Rent vs. Buy” option.
The tax deductions you can take for mortgage interest and property taxes greatly increase the financial benefits of home ownership. Here is how it works.
$9,877 =Mortgage interest paid (a loan of $150,000 for 30 years, at 7%, using year-five interest)
$2,700 =Property taxes (at 1.5% on $180,000 assessed value)
$12,577 =Total deduction
$3,521.56 =Amount you have lowered your federal income tax (at 28% tax rate) ($12,377 X .28 = $2,521.56)
There is not much doubt that for most people owning a home is better over the long term than renting. When you have made the decision to buy, do your homework, and contact a professional REALTOR® to assist you. Note that mortgage interest may not be deductible on loans over $1.1 million. In addition, deductions are decreased when total income reaches a certain level.
Portions of this article reprinted from REALTOR® Magazine Online by permission of the National Association of REALTORS®. Copyright 2008. All rights reserved.