Home Ownership
If you are not completely sure if owning a home is the right decision for you, there are some important things you should consider.
Buying vs Renting
Whether you’re buying your first home, relocating, investing, or meeting the needs of a growing family, homeownership is simply less expensive than renting over time.
When you rent, you are paying your landlord’s mortgage and building equity for him or her. When you pay your own mortgage, you are the beneficiary of increasing equity and eventual outright ownership. As an owner, your payments will one day come to an end, whereas rent payments are forever.
But how do the costs and benefits compare in just the first five years? A rent payment of $1,500 costs you about $90,000 over 5 years. A similar mortgage payment (*assuming average market conditions) enables you to buy a home at a sales price of approximately $250,000 with a down payment of $12,500. At the end of 5 years, your principal loan has been reduced by $21,505. During this time, you also benefited from ongoing appreciation and your home is now worth $312,500. As a homeowner, you are now ahead a net total of $28,495, rather than having spent $90,000 in rent.
*This scenario assumes an interest rate of less than 6% on a 30-year mortgage and 5% yearly home appreciation.
Homeownership is a Good Hedge Against Inflation
While it’s true that some homes appreciate faster than others and some years are better than others, real estate has always been known to keep pace with inflation in the long run. In fact, appreciation rates are usually well ahead of inflation rates, so buying a home is good protection. In general, a home will double in value on average every 7-10 years.
Ownership Offers Tax Advantages
In addition to building equity and benefiting from the reliable appreciation of your home, homeowners also receive tax advantages. Your mortgage interest and real estate taxes are all tax-deductible, which can significantly reduce your effective monthly payment.
Owning a Home Gives You Freedom
When you own your own home, it’s YOURS. You can make improvements or changes knowing they will improve your home’s resale value and put money into YOUR pocket.
When SHOULD you Rent, and Not Buy?
If you’re planning to sell, upgrade, or move within the next 5 years, renting may make more sense for you. Selling costs typically average about 8% of the sale price. Therefore, if your home hasn’t appreciated at least that amount, you could lose money by selling within the first 5 years. You also need to consider the amount you’ll pay toward the principal loan in the initial years of homeownership. Since mortgages are structured so that you pay much more interest in the first few years, it typically takes owners 5 years before enough progress is made on the principal loan to make ownership a better deal than renting.
