Three Reasons to Buy Rather than Rent
Three Reasons to Buy Rather than Rent
By David S. Jones, reprinted from
Asking a real estate agent if you should buy a home rather than rent is like asking a barber if you need a haircut. The answer is a predictable "yes." Of course, everyone doesn’t need a haircut, and everyone doesn’t need or want a house. But most people do. In fact, more than two-thirds of all American households own their own homes.
Not everyone can be a homeowner. Some people don’t want to be one, but many people do. That’s why homeownership is at a record level.
Interest in owning a home has been spurred by historically low mortgage interest rates, which have only recently begun to rise above 6%. Of course, the traditional reasons – including the desire to own a place of their own – continue to inspire would-be homeowners.
There were more than 34 million renting households in the United States in 2002. Many renters rent because they prefer it – it’s a lifestyle choice. Some households either do not want or feel they cannot manage ownership of a house. If you want accessible, flexible housing with little upfront cash requirements, renting is the right choice.
But renting may not be best in the long term, say Carter Murdoch and Lawrence Yun, economists with the National Association of REALTORS®. That’s because the cost of U.S. rental housing has increased an average of 3% per year over the last 10 years. A rental unit that currently costs $750 per month will cost more than $978 per month in 10 years.
There are three advantages to homeownership: taxes, appreciation, and equity.
Let’s say a buyer puts down $10,000 (plus closing costs) to buy a $110,000 home. The remainder is financed with a 30-year mortgage at 6.5%. Monthly principal and interest will be $632 and monthly property taxes $115, a total of $747 – about the same monthly cost as the renter mentioned earlier.
But the buyer has something that a renter does not. Assuming the buyer is in the 30% income bracket, the mortgage interest tax deduction the first year is $162 per month; the buyer also receives a tax deduction for property tax of $34 per month. That’s a monthly tax deduction of $196.
And the benefits don’t stop with taxes. On average, homes nationwide have appreciated at 4.5% over the past 10 years. That’s $4,950 on the $110,000 home in the first year. In the second year, the home’s value is $114,950 and appreciates another $5,173. In year three, the home’s value is $120,123 and appreciation $5,406. You get the idea.
And then there’s equity.
That portion of the monthly mortgage payment dedicated to reducing the principal owned on the home will have added up as well. By the end of year 10, the amount owed the lending institution will have been reduced to $86,620. In other words, the owners have accumulated $13,380 in equity they would not have realized if they had been renting.
After 10 years, a home that originally cost $110,000 could be worth $163,470, assuming a 4.5% appreciation rate. Combining the increase in appreciation and the equity built up through house payments, the average household can expect to accumulate $66,850 in home equity in 10 years. Meanwhile, assuming Murdoch and Yun are correct, the renter who was paying $750 per month is now paying $978.
Taxes, appreciation, and equity are three tangible benefits to homeownership. But there are other appeals – such as the pride of owning your own home.
Deciding whether to buy or rent is much more complicated than deciding whether to get a haircut. But those who decide to buy tend to reap financial rewards.
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