RENT VS OWN PART II
In the last blog entry we looked at the ups and downs of RENTING.
In this post we'll look at Home Ownership. Now right off the bat, as a real estate agent, it's assumed I think everyone should buy. Nothing could be further from the truth. Home ownership makes sense a lot of times but it doesn't other times. The National Association Of Realtors (NAR) has their own agenda of course, but that doesn't mean that every agent truly believes that it's always a good time to buy.
With that said, I do stand behind one of NAR's statements that: "This is the best market in years in terms of CHOICE" . This means that we are in a normalizing market and this isn't like it was a couple of years ago where homes came on the market and got multiple offers competing, thus driving prices etc...there is a legitimate selection of homes on the market now for the buyer who is ready to buy.
So what are the benefits of home ownership? Let's look at them.
UPSIDE TO OWNING A HOME
1. Putting down your roots. Yep, that's a big one for many people and families. To know that they are going to be in the same area for at least so many years. It might be because of school aged children, parents to take care of, family close by, many other reasons to want to be in one place.
2. Tax Savings--Interest on Mortgage payments on a first or even second home is tax deductible. Real estate taxes are deductible as well. So this can be significant if you lower your tax liability. For example:
Joe Taxpayer makes $100,000 a year. For simplicities sake, Joe is single with no children, no child support etc, just to make it easy. Joe buys a house and pays $18,000 in payments, 80% of which initially is INTEREST. Joe also pays $4000 in property tax and HOA.
With no home purchased, Joe's simple tax liability is based on $100,000-his standard deductions=92,500 and at a 28% tax rate, Joe pays $25,900 in income taxes this year.
With home purchased, Joe gets to take some additional deductions. $100,000-standard deductions-$14,400(mortgage interest)-$4000 Property tax/HOA=74,100 and at a 28% tax rate (assuming these deductions did not drop him into a lower tax bracket), Joe pays $20,748 or saves $5152 in taxes.
WHEW! That loses a lot of people but if you assume that you are going to live somewhere paying rent at basically the same amount per month that you would buying a home, then you've just saved over $5,000 year.
3. Appreciation--While homes do not always appreciate, it is a pretty steady, slow way to build wealth. If the home that you buy at $200,000 today appreciates only 8% over the next 8 years, that's only 1% per year and if you check with the county appraisal district, that is very conservative, then at the end of 8 years, your home is worth $16000. That's approximately an additional $2,000 per year in savings based on a VERY conservative appreciation estimate.
4. Amoritization--As you pay on your home, your loan balance decreases as well. So at the end of 8 years, like the example, you would have paid off about $35,000-40,000 of the mortgage balance. So that $200,000 house that appreciated to $216,000, you really owe $165,000 with the ability to sell around $216,000 or about $51,000 in built up equity over the 8 years discussed.
5. You are in control. You make the payment and you will not be foreclosed on.
6. What you do (within legal limits) is your own business in your home. If you want to have pets, you can. If you want to paint, you can.
So what are the downsides to being a home owner?
1. Maintenance--you are the owner and you are responsible for all maintenance. When the A/C goes ka-plooie, you get to have it replaced. When the water heater leaks, yep, that's on you too!
2. Harder to pick up and move. If you want to move, you have to sell, not just terminate a lease.
3. Getting into a home can be expensive. You can expect to have closing costs that can be quite a bit of money and some loan programs require large down payments...some as much as 20%. Of course some as low as 3% and up until recently, maybe no down at all!
Comments(2)