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SMALL BUSINESS
Should You Rent or Buy?
Buying a home is a rewarding experience. You derive a great deal of personal satisfaction from owning a home. Homeownership allows you to build up your
personal net worth over time. Moreover, long-term increases in housing prices nationwide makes homeownership a relatively attractive investment.
In some cases, renting may be a more attractive option. For example, if you plan to move in a year or two, you are unlikely to recover the
closing costs you pay when you buy a home. In addition, finding a home to buy generally takes more time than looking for an apartment to rent.
In addition to building up equity
over time, owning a home offers significant tax breaks. The interest expense that you pay on up to $1 million in home mortgage debt ($500,000 if you are married and filing a separate return) is
tax-deductible.
Your tax savings from the
mortgage interest tax deduction are greatest in the early years of a mortgage loan. For example, on a 7%, 30-year fixed rate mortgage loan of $100,000, you pay $6,968 in interest the first year of the loan. If you are in the 25% income tax bracket, your
tax savings are $1,742. In Year 16 of the loan, you pay $5,090 in interest, which saves you $1,273 in taxes. In Year 24 of the loan, you pay $2,926 in interest, which saves you $732 in taxes.
When you sell your home, you can exclude up to $500,000 in
capital gains if you are married and filing a joint return. (The exclusion limit is $250,000 for other tax filers.) You will need to pass the IRS's
ownership
and use
tests to show that the home has been your primary residence for at least two of the past five years. In addition to mortgage interest, you can also deduct your local
property
taxes on your income tax return.
As a homeowner, you can tap the equity in your home in the future with a
home
equity loan or line
of credit. Interest expense that you pay on up to $100,000 in home
equity debt is tax-deductible ($50,000 if you are married and filing a separate return).
Yet, renting does have some advantages. For one, renting doesn't require
you to make a down
payment, which can easily reach $25,000 or $50,000. A total monthly payment for rent is generally cheaper, too, when you include all the other costs of owing a home. In addition to paying off a loan with interest, homeowners routinely pay
homeowner's
insurance and property
taxes. They may also be required to buy private mortgage insurance (PMI).
Finally, homeowners face maintenance and home-improvement costs that renters avoid.
In general, renting has a lower financial burden, requiring smaller monthly outlays. With the extra cash that you save each month, you may be able to invest and earn a
rate
of return that compensates for missed opportunities of homeownership.
Renting may be a wiser course of action if you plan to relocate to another city soon or are in uncertain financial circumstances. For persons fresh out of school or newly divorced, renting may be the only realistic option.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a mortgage lender or financial adviser.
2008-07-21 17:01:00
Mortgage Basics
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