Buying vs Renting: Which Is Right For You?
Many new home shoppers wonder if renting is better than buying.
This is an especially important question today because the challenges facing the mortgage industry over the past few years have pushed more and more families into apartments, driving up demand and the rent.
Just a few years ago there was a fairly wide gap between the monthly cost of a new home mortgage and an apartment. But today, as apartment complexes have filled up to capacity, rents have risen to and even passed the monthly cost of owning a home. But there are many other reasons why buying a new home is better than renting.
Which Costs Less?
Buying a home actually costs less than renting a home when you include the income tax benefits of home ownership.
Here’s how it works: Determining the cost of an apartment over 5 years is simple. If your rent is $1,100 per month, your five year cost is $66,000 ($1,100 X 5 /years X 12 / months per year= $66,000). There is no income tax deduction for the rent you pay on your rental residence.
If you purchase a new home, the government will allow you a tax deduction for the interest and real estate taxes that you pay. The actual deduction will be based on your actual interest and taxes paid, but for comparison to the rental unit, assume you purchase a house for $175,000 with 5% down payment and a 30 mortgage at 4% on the balance.
Your monthly principal, interest and real estate taxes will total approximately $1,086.
Over the same 5 year period, you’ll have paid a total of $65,160 and received total interest and real estate tax deductions totaling $49,240. At a 25% income tax rate, you will have saved $12,310 in income taxes, thus reducing your total out of pocket costs over the 5 year period to $52,850, a savings of $13,150 over renting.
So, over the same 5 year period, buying a home is actually less than renting- and it’s yours.
Equity is another strong reason to buy instead of rent.
Equity is the difference between how much a property is worth and how much is owed on it. So, continuing the example from above, if a house costs $175,000 and you borrow 95% of the cost at 4% over a 30 year term, at the end of the first 5 years your loan balance will be $150,400.
Let’s be conservative and say the home’s value grows by 3% a year. The value of the home has increased from $175,000 to $202,900 after five years, resulting in equity in the home of $52,500. As the home owner, you’re entitled to this equity.
If you’re renting a property, the landlord gets the equity. Owning a home is the best way for most of us to increase our personal wealth.
Buying a home is one the biggest decisions that many of us will make and we all want to choose the option that suits us and our family best.
Evaluating the cost of buying a new home versus renting or leasing and taking a careful look at the tax benefits of new home ownership should help us clarify the choice.
As rent continues to rise, more and more families are choosing to leave crowded apartment complexes and move into new homes.
Today might just be the right day to stop growing your landlord’s wealth and start growing your own.
Tom Bevins is Senior Vice President of Hot On! Homes, a new home marketing and advertising company based in Dallas / Fort Worth, TX, with offices in Houston, San Antonio, Austin, and Colorado Springs, CO.
Contact Tom at firstname.lastname@example.org