Buying a home is one of the best long-term investments you can make to build personal wealth. However it isn’t for everyone.
Renting has its advantages. Some have said that renting is throwing away money. It really isn’t any more than purchasing any other good or services. In the end though, rent money never comes back to you.
A home appreciates over time and there are tax advantages to owning that help you keep more of what you earn. Owning a home, however, does have additional costs and responsibilities.
For many, the greatest return on investment is building memories and raising your family in a neighborhood and home that you just plain love.
To make your decision consider the cost, consider the return…
Unlike your rental unit, your home should appreciate over time.
After ten years, assuming a return to an average 4.5 percent appreciation rate*, a $200,000 home will be worth $286,948. Not only do you earn a rate of return on your original purchase price, you also get a return on any subsequent appreciation. *Average price appreciation from 1970 to 2008 was 6.0%.
Over the last ten years, the cost of rental housing in the U.S. has increased an average of 3.5% per year.
If that trend continues, that means that an apartment or home renting for $1,000 per month will cost more than $1,300 a month in ten years. If you rent the same home for ten years, the total amount you would pay for rent will equal $140,777!
Your monthly mortgage payment pays interest on your loan, but it also pays off more and more of the loan. So each month you build more and more equity. The property’s equity increases as you make payments against the mortgage balance, and as the property value appreciates.
None of that $140,777 spent in rent over 10 years mentioned above is returned to you, either through savings or as an investment. When you pay rent, you never see that money again.
For many homeowners, part of the monthly mortgage payment “comes back to you” in tax savings. Here’s an example: You purchase a home that costs $200,000. Your down payment is $10,000 (plus closing costs — expenses incurred to actually process the transaction). You finance the balance with a 30-year fixed rate mortgage at 5.5 percent interest. Your monthly payments (not including utilities, maintenance, insurance, etc.) are:
|Monthly Mortgage & Tax Payments|
|Property tax (1.25% tax rate*)||$208|
|Total Monthly Payment||$1,287|
|Tax savings per month
(25% income tax bracket)
|Mortgage interest tax deduction||$216|
|Tax deduction for property tax||$52|
|Total Monthly Tax Savings||$268|
|Total Monthly Cost after Tax Savings||$1,019|
*property tax rates vary by city and county
Renters save on maintenance costs. They do not have to pay down payments, closing and insurance costs. At times, those savings, if invested in the stock market could provide better returns than housing. In particular, in the early 1990s, one would have theoretically been better off financially investing in the stock market than in the housing market.
And, though you are often required to have a security deposit for responsible renters that money often comes back in full; first and last months rent are often required but that money eventually is used for a monthly payment.
Even with the latest economic downturn, homeowners usually maintain a much greater net worth. According to the Federal Reserve, homeowners accumulate 35 times more personal wealth than do renters. In 2010, the wealth of an average homeowner was more than $174,000.
In the same 2010 Federal Reserve study the median net worth of an average renter is $5000.
A buyer must pay closing costs (typically five percent of the loan amount). If you can’t commit to remaining in the home for at least a few years, then owning is probably not for you, at least not yet. With the transaction costs of buying and selling a home, you may end up losing money if you sell sooner – even in a rising market. When prices fall it’s an even worse idea.
There are also other costs a buyer is responsible for that a renter is not, such as mortgage interest, property taxes, insurance, maintenance and Homeowners Association dues that must be considered when you make your decision. Yearly property maintenance costs can run from 1 to 1.5 percent of a home’s purchase price (according to the National Multi Housing Council). These costs can add up and may even increase significantly over the years.
In many cases, rent can be about the same as or less than the amount a homeowner spends on a mortgage. With the tax benefit for homeowners, the savings can be significant. Also there is little control over rent increases. And, there is an emotional cost of never being able to drive a nail into the wall without the threat of having to giving up some of your security deposit.