Isn't
it always smarter to buy rather than rent? Many
people feel that renting is like throwing your money away, and
that you should buy a house as soon as you can. However, this isn't
necessarily true. Although there can be many benefits to homeownership,
many people find renting more advantageous than buying. Which is
better for you? To find out, you'll need to evaluate many nonfinancial
and financial factors.
The
nonfinancial advantages of renting include: - Moving is easier: Simply find a new home to rent, give the required
notice, pack up, and move (although there may be some complications
if you break a lease). This is particularly attractive to individuals
who are often relocated by their employers.
- You don't need to hire someone to do repairs: Is your faucet leaking,
air conditioner blowing hot air, heater blowing cold air? No worries--just
call the landlord.
- You don't need to maintain the property: Need the driveway shoveled,
the grass mown, or the leaves raked? Don't get up--most landlords include
these services in the lease.
Financial considerations Is
renting really a better financial option than buying? Certainly you'll
save some costs associated only with buying, such as a down payment (though
if you rent you generally must pay two months up front plus a security
deposit), closing costs, and property taxes. You may even save on other
expenses of owning, like purchasing new furniture/appliances, landscaping,
or remodeling. And, you can generally rent an apartment, house, or condo
for less than the monthly cost of buying the same space. The
answer seems easy, doesn't it? But this is deceiving. Rent payments
are not deductible on your federal income tax return (although some
of it may be deductible on your state return), but mortgage interest
and property taxes are if you itemize. As a result, the effective cost
of owning a home may be lower than it appears compared to renting.
To get an accurate comparison, you need to calculate after-tax costs.
Further, there are other financial benefits of buying (e.g., equity)
that you must consider. For more information on the financial benefits
of homeownership, see below. Tip: The
rent vs. buy calculation is complicated and many factors come into
play, such as the price of the home, the amount of your down payment,
current interest rates, the current property tax rate, your income
tax bracket, how long you intend to live in the home, and the amount
of rent you're currently paying. You may want to seek the help of
a financial advisor to determine whether renting or buying makes
better sense for you.
What
are the benefits of homeownership? For
many, owning a home represents the American dream--a back yard,
privacy, a place to call your own. If you're committed to fulfilling
that dream, you'll never be happy renting regardless of any
advantages doing so may hold. Other advantages of homeownership
include: Stability
and flexibility Owning
your own home can provide a certain sense of security.
You won't be faced with the prospect of finding yourself
without a place to live if your landlord dies suddenly
or decides to sell the building, and you won't have
to deal with increases in rent. Caution: The
price of this stability is a certain amount of risk.
If you become delinquent in your house payments,
your mortgagor may foreclose and pursue a forced
sale of your home--and you may lose money on the
sale. Renters are not faced with this possibility
because they do not own the property in which they
live.
Financial
benefits - Income
tax deductions: As you're probably aware,
federal tax laws strongly favor homeowners.
Mortgage interest and property taxes are
tax deductible, provided you itemize your
deductions. If your total itemized deductions
exceed the standard deduction ($10,700
for married taxpayers filing jointly in
2007), this can provide the potential for
an enormous tax benefit, especially in
the early years of homeownership.
- For
2007 only, premiums paid or accrued
for qualified mortgage insurance is
treated as deductible mortgage interest.
Qualified mortgage insurance means
mortgage insurance provided by the
VA, FHA, and Rural Housing Authority
as well as private mortgage insurance
(PMI). The amount of the deduction
is phased out if your AGI exceeds $100,000
($50,000 if married filing separately).
This provision does not apply with
respect to any mortgage contract issued
before January 1, 2007.
- Gain
on sale exclusion: If you sell your
home and qualify, you may exclude
up to $250,000 of your capital gain
from tax. For married couples, the
exclusion is $500,000.
- Equity: As a homeowner, you can borrow against the equity in your home,
using either a second mortgage or a home equity line of credit. The interest
on a home equity loan of up to $100,000 is also tax deductible, regardless
of how you use the money. Many homeowners use home equity loans to consolidate
other high-interest loans, make repairs and improvements, and even fund
a child's education. Lenders will generally allow you to borrow up to
80 to 90 percent of the value of your home.
- Asset
appreciation: You may buy a home with a little of your own money (your
down payment) and a lot of someone else's (your mortgage). However,
if the value of your home increases, the profit is all yours when you
sell it. You benefit from the increased value of the entire property,
even though originally you used only a small portion of your own money
to finance it.
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