Home Sweet Home - Own or Rent?
Spring is in the air and along with it comes a new feeling of freedom after the dreary winter months. Flowers are in bloom, baseball season has begun and it’s just about time for the spring real estate boom. Well, if you are a seller, you are hoping the market is booming. If you are a buyer, you are probably looking for some bargains.
Regardless of whether you are a buyer, seller or neither, now is the time to take a look at your life circumstances to determine what you want to be. Home ownership, while it has advantages, is not for everyone. This article is meant to help you decide where you should be in the housing market.
The decision to buy, sell or rent is not as easy as running the numbers. Later on, we will talk about financial considerations of home ownership, but you first must decide if your personal circumstances warrant home ownership.
Are you currently renting? Do you presently rent either an apartment of house? How’s that going for you? Assuming you are paying a reasonable rent, do you like the flexibility of moving at the end of your lease? Are you single, and therefore not in need of a permanent place to settle and call home? If you are married, but don’t have kids, do you value the flexibility that renting gives you? Just exactly how long do you plan to stay in your current residence? For that matter, how long do you plan on living in the same town? Do you like the idea that if something major goes wrong with your rental unit, the responsibility to have it fixed is the landlord’s and not yours? Do you have children? Is it time to get a bigger place to accommodate your growing family?
If you are presently renting, these are just a few of the questions you will want to consider in deciding to take the plunge into home ownership. Many times, people rent simply because they do not expect to stay where they are very long or don’t want the financial and emotional commitment that home ownership requires. If you currently rent, think long and hard before buying a home. Unless the market is extremely hot, you are probably going to be living in that home for a while. Even though many folks will tell you that a home is an investment, it is generally a very liquid investment and selling it will cost a lot.
Do you own your home? If you presently own your home, you could probably take the questions applicable to renters, reverse them, and begin your own list of reasons to leave or stay. One or two other considerations will be your current family status. Was the home purchased to accommodate a family and now the nest is empty? Are you tired of the upkeep of a home and simply want all the responsibility taken off your shoulders? Do you have a home that is too small and need to add some square footage?
This next question has to be one of the all-time favorites for parents. How good are the schools my kids will attend? You’d be surprised at how many people move simply to get their children in a better school district.
Again, these are just a few of the many personal considerations you might have in deciding whether to sell and become a renter or sell and buy another home. Remember, make your decision based on personal factors first before looking into the hard dollars and cents. You will be much happier in the long run.
Financial and tax considerations
Do you like to pay for the other guy’s tax deduction? You may not have thought about this one, but if you are renting, you are paying for someone else’s mortgage interest deduction, insurance and property tax deduction. At the same time, you are helping that person build an asset using your money. If you don’t believe that, let’s take a look at a hypothetical situation.
Say you can either rent or buy a $200,000 house. If you buy it, the loan payment at 6.125% will be approximately $1,200 per month. Add taxes and insurance to that amount and you will probably be looking at $1,500 to $1,700 per month in total payments. When tax time comes, a large portion of the payment you made will be deductible on your tax return as either mortgage interest or property tax; insurance is not deductible. On the other hand, if the rent charged is $2,000 per month, you are first paying more than what the house note would cost, but the owner is also getting a deduction for the taxes and interest they pay on the house.
There are, of course, other considerations like down payments, closing and other costs, but if you are going to be anywhere for a reasonable length of time, home ownership can make a great deal of sense because the payments can be drastically lower than rent and you get the tax breaks, not your landlord.
Rising rents got you down? Another very nice thing about owning versus renting is that mortgage payments generally stay the same. They stay the same, except for insurance and tax escrows, if you have a fixed rate mortgage. If you have an adjustable rate mortgage (ARM) this may not be true as the interest rates are generally adjusted yearly. If your mortgage is a fixed rate, having the security of knowing about what your housing payment will be over the next 15 or 30 years can save a tremendous amount over rents, which generally increase over a period of years.
Do you itemize deductions? Aside from building equity in an asset, the possible tax deductions are the most important aspects of home ownership. Interest paid on a mortgage of your personal residence or your second home is fully deductible as an itemized deduction. Contrast this with the non-deductibility of credit card, auto and other personal loan interest. Likewise, real estate taxes are deductible as itemized deductions also. As long as you can itemize, Uncle Sam will help the homeowner with the house note to some extent.
Work out of you home? If you use a room in your home regularly and exclusively for business, don’t overlook what are generally non-deductible expenses. Insurance, utilities, repairs and other expenses that are generally considered non-deductible for tax purposes can, when you have a home office, be deducted to some extent on your tax return. You can also compute depreciation on your home and deduct a portion of that if you use the home for business purposes.
There are good and bad points to home ownership and it’s up to you to decide whether the good outweighs the bad. There are many non-financial as well as financial considerations when deciding where you are going to live. While this firm cannot help you with the non-financial considerations to purchasing a home, it can certainly help with helping you maximize the financial possibilities. If you have any questions about the financial aspects of home ownership, don’t hesitate to give us a call.
Have a terrific May.