Should I Buy or Should I Rent?

Should I Buy or Should I Rent?

Ever feel like everyone’s doing it? Buying a home, that is! Most people would agree that owning your own home can be a very rewarding experience. Not only do you have a place to truly call your own, but home ownership can also have financial benefits. Not only do you build up your personal net worth instead of ‘throwing away’ rent but the market trends of increased housing prices make home ownership a relatively attractive investment right now.

This does not mean that home ownership is for anyone. For example, if you’re planning to move in a year or two, you won’t likely be able to recover the closing costs of buying a home and it just might be to you advantage to sit tight and rent until you have more permanent plans. In addition, your situation may mean that you don’t have a choice between owning and renting. This could be the case if you’re just fresh out of school, for example.

So where do you fit into the picture? Read on to glean some insights to help you determine whether you’re meant to be a renter (even for now!) or if home ownership is right for you.
The Benefits of Ownership: Tax Breaks
Not only do you build up equity over time when you own a home, but there are some great tax benefits involved:

• Tax deductible interest. The interest expense that you pay on up to $1 million in home mortgage debt ($500,000 if you are married and filing a separate return) is tax deductible. This is most significant in the early years of a mortgage. Take, for example, a 7%, 30-year fixed rate mortgage loan of $100,000. You’ll pay $6,968 in interest the first year of the mortgage. If you are in the 27% income tax bracket, your tax savings are $1,881. Even in year 24 of the loan, you’ll still be paying interest ($2,926), which will save you $790 in taxes.

• Tax deductible property taxes. In addition to mortgage interest, you can also deduct your local property taxes on your income tax return!

• Capital gains deduction. When you sell your home, you can exclude up to $500,000 in capital gains if you are married and filing a joint return. (The exclusion limit is $250,000 for other tax filers.) You will need to pass the IRS's ownership and use tests to show that the home has been your primary residence for at least two of the past five years.

• Home equity loans and lines of credit: You can tap the equity in your home in the future with a home equity loan or line of credit. Interest expense that you pay on up to $100,000 in home equity debt is tax-deductible (or $50,000 if you are married and filing a separate return).
The Benefits of Renting: Lower Monthly Costs
• No down payment required. A down payment on a house can easily reach $25,000-50,000 or more – funds that may not be accessible right away and which can take a long time to save.

• Relatively fixed costs. When you rent, you have a pretty good idea of what you’re paying each month – there are few surprises. Home ownership is an entirely different story. Not only do you have to pay the mortgage, but you must also factor in homeowner’s insurance, property taxes and even private mortgage insurance (PMI), never mind maintenance and home improvement costs. As a renter, if your toilet springs a leak, you can call the super to fix it. As a homeowner, you have to call yourself – and pay for it yourself.
Generally speaking, if you rent, your financial burden will be lower month over month. If you are disciplined enough to invest some savings, you might be able to earn a rate of return that makes up for the missed opportunities of homeownership.
Note: Information in this article is purely educational and should not be interpreted as financial advice. Consult a mortgage lender or financial adviser for advice specific to your circumstances.

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