It Still Makes Sense to Buy vs. Rent
Nearly a full third of households are still renting. If you’re one of them, you could be paying a hefty price, perhaps an amount that could be sufficient to cover a monthly mortgage payment.
Before thinking about purchasing a home, however, it’s important to note that the housing market is highly localized. So the outlook in your hometown may be different from another city in the state, and certainly very different from cities on the Mainland. Also, home prices are tied to employment. So if the local job market in your area is down, home prices may be down as well. At the same time, a precarious job market may deter potential homebuyers from making a move.
But with all those factors taken into consideration, it could still make sense to buy instead of rent.
Let’s look at an example…
If you are paying rent of $1,500 per month and your landlord increases your payment by a modest 5% each year, you would wind up paying just about $100,000 over a 5-year period. And you would have nothing to show for it, while, if that same amount had been covering monthly mortgage payments, you would have the satisfaction of investing in your future.
And how about improvements you might make to a rental property? It’s not uncommon for renters to freshen up the paint, install new light fixtures, or improve the landscaping. But guess what… all your efforts, labor, and the benefits of those improvements belong to the landlord, not to you.
With convenient down payment options still available for qualified buyers, as well as affordable home prices and low interest rates, the same money you have been spending on rent and home improvements could have been paying for your own home.
With a conventional 30-year fixed rate program and a mortgage of $300,000, the monthly payment, including property taxes and insurance, would be approximately $2,200. Assuming a 25% tax bracket, this would be equivalent to the average amount spent on rent during the same period after your tax benefit.
Because the mortgage is being paid down each month, equity is being built. After 5 years, the $300,000 mortgage could be reduced to $279,000, adding $21,000 to your net worth!
But there is an alternative to laying out the initial increase in monthly payments and having to wait for your tax benefit to show up next April. Instead of waiting to file for the tax benefits derived from your new home purchase, you can simply adjust the amount of your withholding. This allows you to have less tax withheld from each paycheck so you can handle the new mortgage payment more comfortably throughout the year. In essence, you are taking your tax refund as you go instead of letting Uncle Sam hold it all year, interest free.
Visit www.irs.gov and use the IRS withholding calculator. This very handy tool can quickly show you the impact that a change in withholding will have on your net paycheck. Remember to balance this with the expected refund and be sure to check with your tax advisor.
Don’t fall victim to the national headline hype. Talk to a professional who understands your local market. And remember, buying a home is a big step, but it is almost always one in the right direction.