BUYING vs. RENTING
"Is it better to be a homeowner or a tenant?"
By: Tom Lasswell, scfl, Sr. Lending Advisor/ Loan Officer
Guild Mortgage Company / February 26, 2010
As a Lending Advisor and homebuyer workshop instructor, this topic comes up for discussion on a regular basis. At the time of this writing, the US financial and real estate markets are still working through one of the most volatile eras they have seen in modern times. During this time there has been real monetary loss in both stocks and in real estate. It is timely to discuss the Buying vs. Renting question today as home prices remain depressed and lending rates at almost historic lows, but this discussion could be valid during other financial cycles as well.
Whether or not one should own a home, is not only a monetary and financial decision but one of practicality. If one does not possess a stable work environment, does not want to do the repairs or maintenance that a property requires. or wants to be financially responsible for making payments then home ownership is not a good choice. However, in the absence of these, homeownership has proven to offer some excellent financial benefits. Here is what you need to know..
APPRECIATION: You will find in the aggregate over time that housing prices have appreciated at the rate of inflation plus a margin. As home prices rise (appreciate) the homeowner is afforded greater equity (ownership). This is not dependent of what funds were used to purchase the property. Using the financial rule of 72, if we were to estimate say a 5.3% appreciation rate for a time period we could determine that it would take approximately 13.58 years for our homes value to double (72/ (divided by) 5.3). Someone that is renting is not in control of the property, thus is not afforded an increase in equity (net worth).
LEVERAGE: The power of Financial Leveraging in buying a home is often forgotten. . When one buys property, such as a home and takes ownership control, the value of the home will change depending on the supply and demand for homes, and for a longer term period a rise in value should occur. This rise or appreciation as mentioned above is correlated to the value of the home and not the amount of funds used to purchase the property. Qualified homeowners securing financing can and do in many instances finance home purchases with minimal down payment. The ability to own and control a home (asset) of greater value that the amount of those funds used to purchase as in a down payment illustrates the power of financial leverage-
FORCED SAVINGS: Unlike rents that go to pay for using a dwelling, when a homeowner makes a mortgage debt payment of principle and interest, equity is being built by just making payments. The principle or amount owing (using a loan that pays down principle) is reduced each time a payment is made.
TAX BENEFITS: As most of you will agree, the tax laws are complex. Most homeowners are afforded tax advantages that renters are not. Some will argue that homeownership benefits are not as significant as they appear on the surface because of the standard deduction, a deduction built into the tax code that is eliminated when deductions such as mortgage interest and real estate taxes are itemized. This argument doesn't hold up over time in most cases (consult your tax advisor for a detail analysis of your situation). Further today, on top of tax deductions most first time buyers qualify of $1,000's of dollars of Tax Credits including Mortgage Credit Certificates.
Some will make the point that unlike a renter, a homeowner must bear the costs of maintenance and repairs, and they are correct, but even so these expenses are negligible as compared to the financial benefits received above. Further, in dealing with clients over the years, it appears to me that the financial make up of those moving from renter to home owner change. Discretionary expenditures are lower for those now owning verses those that rent. Homeowners dine out less and more of their entertainment time will be spent at home. Why? Maybe because they become more aware of their financial picture and homeownership has now become a financial commitment.
The Federal Reserve Board information will clearly show in their numbers that the Net worth at various income levels of those owning their own home clearly exceeds that of those that rent. Source: (VIP Forum Federal Reserve Board)
Useful websites that will allow you to further explore your particular situation are available. Go to Bing or Google and type in "Renting vs. Buying"
*Comments or questions to the author may be sent to toml@guildmortgage.net
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