Rent or buy? Buy whenever possible
We think you should own a home.
Because it's hard to save all the money you'll need to live your dreams, put your kids through college and successfully retire without one.
It's no accident that homes quickly become the most valuable thing most of us own. We dutifully pay for them with our monthly mortgage check. They can appreciate in value without us lifting a finger. And the government richly rewards home ownership at tax time.
Homes are also the investment that will love you back. You can use and enjoy them every day. They can become a source of pride and achievement that constantly reinforce your effort to do the right thing and build a nest egg for yourself and your family.
We know how hard it is to save. You need that. We all need that.
If you're renting, here's our best advice on how to make the decision to buy a home and a quick look at the financial advantages that might have for you.
Your income and savings -- coupled with the interest rate and house prices in the area where you want to live -- will determine if you can afford a home and the size payment you can afford to make.
Making $50,000 a year might qualify you to buy a home with a small down payment in rural Pennsylvania, but in Seattle you would probably be out of luck. That sum might also do it in some parts of northern California or Arkansas, but not in Southern California or Alaska.
Go to our "required income" calculator to see if you can afford the homes in your area.
If your income will let you buy in your chosen area the next question is: How long do you expect to live there? There are two ways to build equity in a house:
- Paying down the loan.
- Having your home increase in value.
In the early years of a mortgage, most of your monthly payment goes to pay interest. That's true of both a conventional loan and an adjustable-rate mortgage, or ARM. The longer you own the home, the more of your monthly payment goes toward reducing the principal -- the amount you borrowed in the first place.
Let's say, for example, you borrow $100,000 at 6.5% interest for 30 years. Your basic monthly payment, just the interest and principal, and not counting any taxes, insurance, fees or assessments, would be $632.Most of that payment -- $541 -- will go toward interest and $90 will go toward principal. After two years you would owe $97,689 in principal, and you would have $2,310 in paid equity.
The rest of your equity would be determined by the value of your house. Even though history shows that the value of your home will probably have increased, thus increasing your equity, you cannot be sure that it will. Even if it does increase, no one can predict by how much.
At the end of two years, you would have more than just additional equity. You also will have paid more than $12,800 in interest, which is tax deductible. The same is true of your property taxes which, depending upon where you live and the value of your home, can be hundreds or thousands of dollars a year.
It is important to realize that you do not deduct the interest or property taxes directly from the amount of federal income tax you pay.
Here's how it works. Mortgage interest and property taxes, like other local and state taxes, medical bills, charitable donations, and certain other expenses, are considered itemized deductions. You add up all the qualifying itemized deductions and then subtract that amount from your income.
The savings are based on the fact that you pay taxes on a lower amount. If you make $85,000 a year and have $20,000 in itemized deductions, you would be taxed on an income of $65,000 instead of $85,000.
There is no tax benefit to renting, even though you are generally paying the property owner's mortgage interest and property taxes.If you're looking for a bottom line number to make the buy versus rent decision, keep in mind that the cost of selling a home is about 10% of its value.
When you sell your house, will your paid equity, your home appreciation equity, tax savings and property taxes cancel out the sales cost and the closing costs?In the long run, it certainly it does for most homeowners.