The Decision to Buy or Rent a Home

A very neat American house with gorgeous outdoor landscape. Northwest, USA.

Buying a home has long been considered part of the American Dream. There is emotional significance to being able to say “my home belongs to me.” Also, the United States tax laws have historically been skewed to encourage home ownership. However, the decision whether to buy or rent a home is complicated and depends on several factors. First of all, consider the length of time that you will spend in your home. In general, the longer you plan to live in your home, the more sense it usually makes to buy instead of renting. Those in the military or in job situations that may be in flux might be more inclined to rent for apparent reasons. The reason for this is because of the high cost of buying and selling homes. There are many components to these costs such as commissions, title insurance, escrow fees and so on. If you move often and have to sell your house each time, these costs will drain a lot of value from your resources. Another option is to keep your home when you move but to turn around and rent it to someone else. If you take this route, however, there are additional complications that you must deal with. Property management is not for the faint of heart. In summary, a good rule of thumb is to consider buying if you plan to keep the house for at least five years.

Secondly, you must factor in the mortgage interest rate that you can get on your home loan. A lower interest rate makes buying relatively more attractive. Your mortgage interest rate depends on prevailing rates at the time of purchase, as well as your credit rating. There are choices, such as 15-year or 30-year mortgages, fixed or adjustable rates, and different amounts of down payments. You can compare mortgage rates online relatively quickly.

Next, look at your income tax situation. Because of the potential deductibility of mortgage interest and property tax, your marginal tax rate may affect the attractiveness of buying. Also, there is a tax break on the proceeds from the sale of your home in certain circumstances. Inevitably, the future income tax situation is subject to change as the political winds shift. Before the writing of this post, US income tax law was changed to limit the dollar amount of deductions that can be taken for certain property items. Check with a tax professional if you are uncertain about your situation.

The prevailing rental rates in your area can be an essential factor. If rentals are in relatively short supply, rental prices can be higher than usual. This discrepancy makes buying more attractive.

Potential future growth in home prices in your area is a significant factor in the attractiveness of owning versus renting. However, since future growth is unknown, it does add some risk to home ownership. For instance, in some areas of the country real estate values are very volatile and can drop or rise drastically over a short period. Homeownership expenses must be considered. Homeowners incur many expenses that renters do not. Some of these are property taxes, maintenance, insurance, closing costs, and improvements. If you enjoy yard work and are relatively handy, you can save money on home maintenance and improvements. You must really be sure that you enjoy this type of work as there will be plenty of it to do. The bottom line is that buying a home is a complicated decision requiring the consideration of many factors.

If you want to use a calculator to illustrate the value of home ownership versus renting, please visit www.lifeanalytics.com/buy-or-rent-a-home.html

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