In recent years, the cost of buying a home in most markets has increased while the cost of renting remains flat. But it’s never a good idea to base long-term investment decisions on short-term conditions. If you decide to rent instead of purchasing a home, you may be in a bad spot if the cost of rentals in your area shoots up.
Typically, a weak housing market corresponds with a strong rental market. If the rental market is strong in your area, it may indicate weakness in the local housing market, which typically favors buyers over sellers.
When you buy a home with a fixed-rate mortgage, you can lock in a predictable monthly payment for 15 or 30 years. That means the largest part of your housing costs, principal and interest, are fixed. For some people, that stability, along with the sense of community that comes from being a homeowner, is enough to tip the scales toward home ownership.
If the monthly cost of buying vs. renting is comparable, you may consider some related factors to help you decide. When you rent, your landlord receives any appreciation and tax breaks associated with owning the property. If you plan on any significant remodeling, buying may be also preferable to renting.
Some people just don’t have the discipline to set aside money each month to save and invest. In this case, a home is more than a shelter, it acts as sort of an automatic savings account. You can build your savings in two ways:
First, each month a portion of your payment goes toward the principal to build equity in your home. In the early years of the mortgage, most of your payment goes toward interest. Over time, however, that turns around and your equity growth begins to accelerate.
Second, U.S. home prices have always appreciated over the long term. Average appreciation on a home is, 5-6 percent annually, according to the National Association of Home Builders. Over time, history has shown that owning a home is a solid financial investment despite periodic market downturns.
And wouldn’t it be great if the government kicked in some money to help make home ownership more affordable? Because of deductions on mortgage interest and property taxes, the practical effect is that the government is subsidizing your home purchase. In fact, home ownership provides two of the best ways to reduce your tax bill.
Mortgage interest you pay can be deducted from your gross income to reduce your taxable income. For example, say you take out a $300,000 mortgage loan at 6 percent interest. You pay $18,000 a year in interest on that loan. That means your taxable income for the year is reduced by $18,000. If you’re in the 25 percent tax bracket that means a one-year tax savings of $4,500 (25 percent of $18,000).
Property taxes may also be deducted from your gross income, lowering your overall annual tax obligation. Property taxes are levied on homeowners in the United States to pay for a variety of public services. You may see local property tax rates between 1 and 2 percent of the property’s current assessed value, depending on where you live. Property taxes are fully deductible on your primary home, second home or vacant land.
Speaking of tax smarts for home buyers, don’t neglect the selling side of the equation. Be sure to consult your advisor about tax breaks that may be available on the proceeds from selling your current home, and on any “points” paid when taking out a mortgage loan.
Posted by Charles Warnock on 09/15/2008 02:06 PM