If you're like most consumers, homeownership involves the largest financial transaction you'll participate in during your lifetime. If you want to ensure that you make sound financial decisions, you should first educate yourself about real estate transactions and then engage in careful planning. Your first step should be to ask yourself: "Do I really want to own a home?"
Isn't it always smarter to buy rather than rent?
Many people feel that renting is like throwing your money away, and that you should buy a house as soon as you can. However, this isn't necessarily true. Although there can be many benefits to homeownership, many people find renting more advantageous than buying. Which is better for you? To find out, you'll need to evaluate many nonfinancial and financial factors.
Nonfinancial advantages of renting
The nonfinancial advantages of renting include:
- Moving is easier: Simply find a new home to rent, give the required notice, pack up, and move (although there may be some complications if you break a lease). This is particularly attractive to individuals who are often relocated by their employers.
- You don't need to hire someone to do repairs: Is your faucet leaking, air conditioner blowing hot air, heater blowing cold air? No worries--just call the landlord.
- You don't need to maintain the property: Need the driveway shoveled, the grass mown, or the leaves raked? Don't get up--most landlords include these services in the lease.
Is renting really a better financial option than buying? Certainly you'll save some costs associated only with buying, such as a down payment (though if you rent you generally must pay two months up front plus a security deposit), closing costs and property taxes. You may even save on other expenses of owning, like purchasing new furniture/appliances, landscaping, or remodeling.
However, you may not save much in the long run because rent payments are not deductible on your federal income tax return (although some of it may be deductible on your state return). Mortgage interest and property taxes are if you itemize. As a result, the effective cost of owning a home may be lower than it appears compared to renting. To get an accurate comparison, you need to calculate after-tax costs.
What are the benefits of homeownership?
For many, owning a home represents the American dream--a back yard, privacy, a place to call your own. If you're committed to fulfilling that dream, you'll never be happy renting regardless of any advantages doing so may hold. Other advantages of homeownership include:
Stability and flexibility
Owning your own home can provide a certain sense of security. You won't be faced with the prospect of finding yourself without a place to live if your landlord dies suddenly or decides to sell the building, and you won't have to deal with increases in rent.
Caution: The price of this stability is a certain amount of risk. If you become delinquent in your house payments, your mortgagor may foreclose and pursue a forced sale of your home--and you may lose money on the sale. Renters are not faced with this possibility.
As a homeowner, you'll also have almost unlimited flexibility to personalize your home. From painting and wallpapering to landscaping to putting in a skylight or even adding a room, the possibilities are endless. Renters typically don't have this freedom.
Income tax deductions: One of the most important tax benefits that comes with owning a home is the fact that you may be able to deduct any mortgage interest that you pay. If you itemize deductions on your federal income tax return, you can deduct the interest on a loan secured by your home and used to buy, build, or substantially improve your home.
Gain on sale exclusion: If you sell your home and qualify, you may exclude up to $250,000 of your capital gain from tax. For married couples, the exclusion is $500,000.
Asset appreciation: You may buy a home with a little of your own money (your down payment) and a lot of someone else's (your mortgage). However, if the value of your home increases, the profit is all yours when you sell it. You benefit from the increased value of the entire property, even though originally you used only a small portion of your own money to finance it.
Connect with a professional
The rent vs. buy calculation is complicated and many factors come into play, such as the price of the home, the amount of your down payment, current interest rates, the current property tax rate, your income tax bracket, how long you intend to live in the home and the amount of rent you're currently paying. A Farm Bureau financial advisor can help you determine whether renting or buying makes better sense – and what that means for the rest of your financial picture.