Even in Short Term, Buying a Home Can Be a Good Investment

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If you pay that same $1,000 a month as a mortgage payment, at the end of the month you will have had a place to live—just like the renter. Unlike the renter, however, you will be building equity in your home and most likely taking advantage of rising property values. As a bonus, you can probably deduct the interest you pay on your mortgage loan from your federal income tax. If you keep that house and the fixed-rate mortgage for three years or 30 years, that monthly payment will never go up, no matter what happens to property values or the economy.

Now let's look at what that $1,000 means in terms of buying or renting power. We know that $1,000 will get you a better apartment in some cities than in others, depending on property values. It's the same with a $1,000-a-month mortgage payment. As far as you are concerned, your $1,000-a-month rental payment is just that-—rent. A $1,000 a month mortgage payment, however, is composed of four major elements referred to as P-I-T-I. " P" stands for principal, the actual portion of the payment that lowers the principal on your loan--the total amount borrowed. The first " I" refers to the interest on the loan, and the second " I" refers to insurance on the property as well as any assessments required. The " T" refers to property taxes the owner pays and they often increase from year to year. " T" varies from region to region, even neighborhood to neighborhood. Let's consider taxes to be $200 a month in our example.

At 6.125 percent interest over 30 years, the remaining $800 of your monthly payment would get you a loan of $131,600, and a home in the $138,000 to $165,000 range depending on your down payment. This brings us to two major " problems" that many people raise when they claim they cannot afford a home—the down payment and closing costs. In today's market it is possible to get a no-down-payment home loan through the VA (Department of Veterans Affairs) or the FHA (a mortgage loan insured by the Federal Housing Administration). Many conventional lenders also offer no-down or low-down payment mortgage loans. As far as closing costs go, when you rent an apartment you often have to pay first and last month's rent, plus a security deposit and maybe a pet deposit, as well. In many cases that amount equals normal closing costs.

Assuming a $131,600 mortgage loan with no down payment, at the end of your first year you would have paid roughly $8,000 in interest and reduced the amount owed on the mortgage by approximately $1,575. That means you would " own" 1.2 percent of your home. That would be in addition to any increase in the value of your home, and the $8,000 in interest payments would serve as a tax deduction. In year two you would pay $7,900 in interest and reduce the principal by $1,680. That would increase your " ownership" to 2.48 percent, plus the increase in property value, and you would have a $7,900 tax deduction. By the end of year three you would own 3.83 percent of your home, plus any increase in property value, and you'd have $7,800 to deduct from your taxes.

What would you have if you had rented for those three years? You would have paid more than $36,000 in rent, because rent increases as property values do. What wouldn't you have? You'd have no equity, no ownership, and no tax breaks. It is true that when you add in fees and commissions, it normally costs about 10 percent of the selling price to sell your house. So to break even on that $131,600 house, you would have to sell it for $144,700.

If property values increase at roughly 3.5 percent per year—and in today's market most home values are going up more than that—your home would be worth $145,900 at the end of three years. You would also have your $5,000 equity. So even if you sold the home for $145,000 you would walk away with $5,900 in cash, which could serve as the down payment on your next house.

Home ownership isn't all about profit, though. When something goes wrong, you can't call the landlord. You call the repairman and pay for it. And some of these repairs could be costly, e.g., a new furnace or air conditioning system or a roof replacement, but the repairs and improvements you make maintain or improve the value of your home.

In today's market many people are seeing their property values increase by 10 percent in less than three years. In many areas they see this happen in less than two years. So, should you rent or buy? That's your decision. But now you have the information you need to make an informed one.