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Buying A Home

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Mortgage Or Rent

The decision to own a home rather than renting one is often dictated by simple economics. If you cannot come up with a down payment - usually 5%-30% of the home’s price - you cannot buy. Even if you have the down payment, will a financial institution approve a loan based on your current income, debt, and credit score? Perhaps you qualify for a low interest loan. Perhaps you have someone who will co-sign the mortgage.

Owning a home has certain advantages over renting a home, and these advantages come with a price. There are tax breaks for owners. Perhaps the largest tax break comes by deducting the mortgage interest payments from your income. Be sure to compare this deduction against the alternative standard deduction to see if there is actually an advantage, and remember that you are actually saving only the tax on the deductible amount. If you are in a low tax bracket, your savings are also low.

Another possible long-term advantage is that your property builds equity as you pay down your mortgage and property values increase. Sometimes property values do not increase, however, and some homes fall in value as they or their neighborhoods age. Consider that the value of your home must increase more than the amount of your investment for you to realize a profit. Over the length of your mortgage, your payments may add up to double or triple the original purchase price. Beyond this, your mortgage payments represent approximately 70% of your investment, considering the additional property taxes, insurance, and upkeep. Compare the long-term cost of renting against what equity you may actually build. Then consider if you might do better if you invest that extra expense in other long-term financial instruments.

Renting has its advantages as well. Mobility is much more flexible when renting, as renters are obligated to stay in their homes only as long as their lease requires. Many leases are month-to-month. An owner cannot as easily move, as their obligations continue to exist until the home is sold - if it can be sold. Renting also avoids property taxes and insurance. While renters should have renters insurance, they need not insure the home and property, as owners must. Renting may free up enough money for investments other than real estate.

You can find a Rent vs. Buy calculator on the Internet to help you make these decisions.