Compare the advantages of renting and buying a home.
Should You Own a Home?
The challenge in doing an “apples to apples” comparison of the cost of homeownership and renting is that owning has some hidden long-term costs and benefits, and they can vary from year to year. There’s homeowner’s insurance, property taxes, private mortgage insurance (PMI), and maintenance to pay, for instance. But on the other side of the ledger, you may be able to save money with tax advantages and build wealth as a homeowner. Here are five reasons why you might want to make homeownership one of your financial goals:
Homeownership Pro #1: Build Equity
The first major attraction of buying is that you can build equity and wealth for the future. Equity is the difference between a property’s market value and what you owe on it. For instance, if your home is appraised at $200,000 and your mortgage balance is $150,000, then you have $50,000 ($200,000 - $150,000) in equity.
As we know, there’s no guarantee that home values will always go up, but historically real estate has been an excellent long-term investment. Additionally, if you have a fixed-rate mortgage, an increasing portion of each monthly payment goes toward reducing your mortgage balance (which helps builds equity)—whereas rent payments are nothing but a pure out-of-pocket expense. Owning real estate gives you the opportunity to build wealth from price appreciation, by paying down your mortgage, or from both.
Homeownership Pro #2: Tax Incentives
[[AdMiddle]To make homeownership even more attractive and affordable, the government gives you several incentives, such as the mortgage interest tax deduction and the capital gains tax exclusion, which lower the total amount of tax you have to pay.
Homeownership Pro #3: Low Mortgage Rates
An advantage to owning a home right now is that mortgage interest rates are at historic lows and that saves you a bundle! Here’s an example: If you borrow $200,000 at a 7% annual interest rate, your monthly payment for principal and interest would be $1,330. But if you got that same loan at today’s going rate of 4.5%, your payment would be just over $1,000.
Low interest rates can make owning a home cheaper than renting—even with the additional costs of private mortgage insurance, homeowner’s insurance, property taxes, and maintenance. Of course, that won’t be the case in large cities like New York or San Francisco where home prices are notoriously high. Take a look at the index at trulia.com to find out whether you’re better off renting or buying in certain cities.
Homeownership Pro #4: Inflation Hedge
Another advantage of having a fixed-rate mortgage is that you lock in the cost of your home for the term of your loan, such as 15 or 30 years. Rents may increase during periods of inflation, but a fixed mortgage can’t go up. That can make owning a home much more affordable when prices rise.
Homeownership Pro #5: Ownership Pride
The last pro of owning a home is certainly the pride you may feel about having your own patch of land and space to spread out. The sky’s the limit if you want to decorate, remodel, plant a giant pumpkin patch, or raise emus (adhering to local zoning ordinances, of course).