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The only one who benefits from a rent check is the landlord.  Renters never see their monthly rent again and they cannot take the tax deduction for the money paid.  Home buyers on the other hand, spend part of the monthly payment buying an asset they can eventually sell.  The remainder of the payment, interest to the lender, may be fully deductible in most cases.

If you are currently renting, or you are moving and debating whether to rent or buy, take a look at how your housing payments could be put to a better use purchasing a home.  The real question may be whether you can afford not to buy a home.

Stabilize Housing Costs

As a renter you may be subject to a rent increase each time your lease renews.  You can end up paying more and more every year for a place to live, with no limit and no financial return in sight.

Homeowners who take out a fixed rate mortgage can look forward to the same monthly principle and interest payment as long as they own their home.  Even with an adjustable rate mortgage, payments would increase as interest rates rise, but the increases would be “capped” to a maximum amount for each adjustment period over the life of the loan.

Whether buying with a fixed rate or an adjustable rate mortgage, when the loan is paid off, homeowners enjoy a place to live with no required housing payments.

Add Up Tax Savings

Most homeowners can take an annual tax deduction for mortgage-interest expenses, while holding their housing costs constant.  The tax savings alone make the purchase of a home a wise financial decision for most people.

For example, if your rent payment is $1,000 per month.  If you had a mortgage payment equal to that amount, you could buy a home worth $167,000 with a 10% down payment on a 30 year mortgage at 7%.  The mortgage interest you would pay in your first year of homeownership would be $10,473.  If you are in the 25% tax bracket, deducting your first-year interest expense would save you $2,618 in taxes - $218 per month.  That means your $1,000 principal and interest payment would really be $782 with tax savings taken into account.  After five years of ownership, your tax saving would total $12,795.

Because your payment schedule is “amortized” so you pay the same amount every month, in the early years of your loan most of each payment will go toward paying interest, with only a small portion paying off principal.  Every month you will pay less that the previous month toward interest and more toward principal.  As your interest expenses decrease over time, so will your annual tax savings, but your equity in the home will increase.

Build Wealth

Using the same example, after 12 months of homeownership you will have paid off $1,527 of principal.  After five years, you’ll have paid back $8,820.  If that doesn’t sound like much, consider how your home may increase in value over five years. (Although there is no guarantee your home will appreciate, historically, property values do tend to increase over time.)

Let’s assume your home’s value grows by a modest 4% per year for five years: it would be worth $203,192.  With the original loan amount down to $141,488 after five years, your equity would be $61,704.  You’ll have made $45,000 on your original $16,700 down payment.  Adding in tax savings, your investment will have grown by 446%.

Look Ahead

Most homeowners eventually sell their homes.  When they do, they can take advantage of a terrific tax break – a capital gains tax exclusion – which renters cannot reap on other types of investments.  If you sell a primary residence that you have owned and lived in for two of the previous five years, you may be able to keep profits up to $500,0000 (filing jointly) or $250,000 (filing single) tax free.  That makes owning a home an even better investment.

Calculate Expenses

The biggest impediment to homeownership for many renters is putting together a down payment.  Remember, thought, when you rent a place to live you normally have to pay a security deposit and, perhaps, both the first and last month’s rent in advance.  Instead, you could be putting that money toward a down payment on your own home, combining it with other cash assets – savings, liquidated investments, gifts from parents, a loan from your retirement plan, or other sources. 

Borrowers with good credit are often surprised at how little cash it takes to buy a home today, thanks to a very competitive mortgage industry as well as local or state sponsored programs that encourage homeownership. 

Of course, homeowners do have some expenses that renters don’t – real estate taxes, home maintenance, homeowner’s insurance, buying and selling costs, and perhaps homeowner association dues.  These expenses can vary considerably depending on where the home is located, what type of property it is, the age and condition of the property when purchased, and how long the owner keeps it.

Recognize Advantages

The benefits of owning a home can very just as costs do, depending on the type of loan you select, current interest rates, your tax bracket, local property appreciation rates and, again, how long you have ownership of the home.  But those are just the financial considerations.  Homeowners experience many less tangible but very real benefits compared with renters – more freedom of lifestyle, pride of ownership and a greater sense of stability and security.

Talk With the Pro’s

As Real Estate professionals, we can supply you with all of the local market data and up-to-date information you’ll need to make a sound decision about buying versus renting.  We can help you determine how much home you can afford and what type of loan would best meet your needs.  We’ll also be happy to show you available properties that match your preferences and budget, or we can keep a lookout for your perfect home if you are not quite ready to buy now.