Buy or Not
Buy or Not
The two items that I would like to compare and contrast in this essay are the pros and cons of buying a home versus renting. The advice given over the years has steered people in the direction of buying rather than renting. People say that renters throw money away because they never gain any equity in their rental property. Renters are missing out on tax deductions, they say. But, financially-speaking, is owning a home really better than renting? Take a look at the costs.
Overall, renting property has fewer costs than home ownership. Notice I said fewer and not lower. Whether renting is lower than buying depends on additional factors that we'll look at later on. The costs of renting are fairly simple:
Rent (often increases every year due to inflation)
Renter's insurance
Membership or association fees, if you live in an apartment complex or community
Lease breaking fee, typically a few months' rent is due if you vacate the rental property before your lease is up
Costs of Owning
Owning a home comes with a longer list of costs.
Purchase price of the home
The loan amount, which can be different from the purchase price if you had a down payment or if you borrowed to include your closing costs
Loan interest rate, the cost of borrowing to purchase your home
Homeowner's insurance
Private mortgage insurance, due until you have 20% equity in your home. You often don't have to pay PMI if you make a down payment of 20% or more.
Property taxes
Maintenance costs
Doing the Math
To see which costs more, you would have to compare your total cost of renting for a certain number of years to the total cost of owning for the same time period. You could work it out on paper or you could use an online buy vs. rent calculator to help come up with the correct numbers.
Let's take a scenario: Let's say you're currently renting an apartment at $1,000 a month and paying $30 a month in renter's insurance. Your apartment typically has 3% rent increases a year. So, next year, your rent will be $1,030; the year after, $1,060 and so on.
You're looking at purchasing a home for $200,000. You have a 20% down payment saved up ($40,000). You've been approved for a $160,000 30-year fixed rate mortgage at 6%. Homeowner's insurance for your property will be $1,200 a year, property taxes will be $2,000 a year. Finally, the current owners tell you they spend about $1,500 each year to maintain the home.
In this case, without taking into account tax savings, home appreciation, or potential investment earnings, buying a home saves $42,450 over renting. Those numbers are pretty straightforward and leave out a few real-life assumptions.
Consider the Opportunity Cost of Investing
Most people who argue that renting is better than home ownership take into account gains from investing the difference between the monthly costs of owning versus renting. Using the same numbers from above, if you were able to earn 8% from an investment over 30 years, renting would save $92,081 versus buying.
Tax Savings from Home Ownership
On the other hand, homeowners argue that homeownership is better partly because of the tax benefits. Current tax rules allow homeowners to deduct a certain amount of mortgage interest and property taxes paid on their primary residence. However, many taxpayers are unable to take advantage of the mortgage interest and property tax deduction because their itemized deductions don't exceed the standard deduction.
In 2008, the standard deduction for a married couple filing jointly is $10,700. The family would need to have itemized deductions greater than that amount for the mortgage interest deduction to count. Unfortunately, mortgage interest alone seldom exceeds that amount. Of course, if you have other deductions, like medical expenses or charitable contributions, you may be able to take the mortgage interest and property tax deductions.
If we assumed you were in the 25% marginal tax bracket, you could potentially gain $62,179 in tax savings over the time you purchased your home. But, if we continue to consider investment gains, renting saves $18,568.
How Home Appreciation Factors Into the Equation
Having home equity is another benefit of renting over buying. On paper, home appreciation makes home buying more attractive than renting. But, in reality, home appreciation is still on paper. Unless you sell your home, your wallet won't know the difference in your home value.
If we assume your home appreciated at 4% over the 30 years of your home loan, buying saves $24,959.
The Verdict
As you consider the pros and cons of renting and buying, consider that renting typically only makes financial sense when you invest the money you would have been spending on buying a home.
I looked through a few buy vs. rent calculators and none of them calculated the cost beyond 30 years. That's an important part of the decision because if you choose to buy, that's the point when you no longer have a mortgage payment. However, if you rent, you'll continue paying rent indefinitely. You have to decide whether that's an expense you want to have in your retirement years. Online Shopping and the Green Movement Trends in Online Shopping Desire HD deals on pay monthly contracts Why Buy a Miter Saw Is it worthy to buy the Nintendo 3DS? What is usually indicated in the payslip? What to do when your payslip is lost Online Shopping 101; Why This Is The Way To Go For that perfect cleaning buy cheap Bosch washing machines Enjoy Online Shopping of Fusion Drum Loops I am looking to buy a Bed Few things to know before you buy the riflescope Online grocery shopping with attractive discount prices