Should I Buy My Home or Rent?

Reviewed Apr 26, 2017

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Summary

Consider:

  • How long you will be living there
  • Ownership costs

Not so long ago, just about everyone seemed to regard home ownership as a no-brainer route to wealth. If you were still renting, is was only until you could save up money for the down payment if you even needed one. The bursting of the 2000s real-estate bubble shook such assumptions to the core. For the period from 2006 to 2011, at least, renting looked like a much smarter investment than owning.

So is owning a home a bad bet? Only time will tell, but recent history has driven home the point that home ownership isn’t for everyone. If you’re thinking of buying a home for the first time, you need to ask some questions—about finances, future plans, and lifestyle choices. Here are some of the most important ones:
 
How long will I be staying? 
 
Owning a home can be a profitable investment in the long run if your timing is right. But if you’re not ready to put down roots, you can lose a lot of money. “Buying (a home) has some not-so-hidden costs, like closing costs, and if you’re not staying, they can really jack up what you’re paying,” says financial writer and editor Virginia Morris. Morris, co-author of several personal finance books including the Wall Street Journal Guide to Understanding Money and Investing, says renting usually is smarter if you’ll be moving every couple of years. That’s something to consider, for instance, if your job situation looks iffy or if you want to change employers.
 
Just how long is long enough depends on a number of factors, not just the price of the home, the closing costs and the interest rate on the loan, but also ongoing costs like property taxes, upkeep, and insurance, as well as the income you would get from investing money that would otherwise go into a down payment. And don’t forget the costs of selling a house, which include (but don’t end with) commissions paid to a real estate agent. As we’ll see below, you can plug all these numbers into a calculator to see how long it might take before you can “break even” on ownership vs. renting.
 
What’s my tax bracket? 
 
The mortgage interest deduction is one of the last real tax breaks available to most Americans. But it benefits some taxpayers more than others. Those in higher tax brackets get the bigger bang for their mortgage bucks. If you’re in the 33 percent federal bracket, for instance, you’ll pay just 67 cents after taxes for every dollar of interest. Taxpayers in the 10 percent bracket pay 90 cents on the dollar after the deduction. Owning a home may still be a good idea if you have a modest income (and have enough deductible expenses to itemize them), but the tax break is most dramatic for high earners.
 
Another tax break, though, is a boon to all homeowners, particularly those who don’t own million-dollar mansions. This is the exclusion from taxes (up to $500,000 for a married couple) of the capital gains from the sale of one’s main residence.
 
Do I really want the lifestyle? 
 
Strange as it may seem to the hard-core suburbanite, not everyone hankers for the responsibilities of owning a home. And you don’t have a landlord to complain to anymore. “I have a friend who gets out of the city and breaks out in hives at the thought of all that space,” Morris says. “He’ll never own a home.”
 
Ownership costs go well beyond cleaning the rain gutters and mowing the lawn. You’ll pay property taxes, which are tax deductible, and a number of non-deductible costs such as insurance and bills for utilities, sewers, and other public services. Then there’s the constant fight against wear and tear. Experienced homeowners know that repainting, re-carpeting, and the countless other repair and renovation tasks can cost a lot over time. One rule of thumb is to figure on average annual upkeep costs of about 1 percent of a home’s value. As a middle ground between renting and full-fledged home ownership, you might consider a condominium or co-op, which give you apartment-style or townhouse settings with an ability, as in single-family homes, to build up equity.
 
Equity is probably the biggest plus in owning a home. As a home increases in value over the years, your wealth increases as well, as long as you do not increase the amount you’ve borrowed on the home. But as everyone knows by now, home values also can fall and wipe out all your equity. Millions of homeowners have found themselves “under water”—owing more than their homes are worth. In addition to the widespread slump in housing of the past decade, home markets have also seen prolonged regional downturns in the past. And a poorly located home will lag even in a strong market.
 
To make the rent-or-buy decision, you first need to be able to buy; that means having enough money for a down payment. Then, you can weigh all the factors with one of the many web-based calculators designed for this purpose. Do some research, especially in your local housing market, because factors such as property taxes and appreciation in home values can vary greatly from place to place. 
 
Resources
 
Books:
 
Home Buying for Dummies, fourth edition by Eric Tyson and Ray Brown (John Wiley & Sons, 2009) has a chapter on the rent-or-buy decision.
 
On the Web:
 
For the National Association of Realtors’ current data (up to the most recent quarter) on median home prices by metropolitan area, go to http://www.realtor.org and click the “Research and Statistics” link. Then click “Metropolitan Area Prices.”

By Tom Gray
Source: Virginia Morris, editorial director, Lightbulb Press; National Association of Realtors

Summary

Consider:

  • How long you will be living there
  • Ownership costs

Not so long ago, just about everyone seemed to regard home ownership as a no-brainer route to wealth. If you were still renting, is was only until you could save up money for the down payment if you even needed one. The bursting of the 2000s real-estate bubble shook such assumptions to the core. For the period from 2006 to 2011, at least, renting looked like a much smarter investment than owning.

So is owning a home a bad bet? Only time will tell, but recent history has driven home the point that home ownership isn’t for everyone. If you’re thinking of buying a home for the first time, you need to ask some questions—about finances, future plans, and lifestyle choices. Here are some of the most important ones:
 
How long will I be staying? 
 
Owning a home can be a profitable investment in the long run if your timing is right. But if you’re not ready to put down roots, you can lose a lot of money. “Buying (a home) has some not-so-hidden costs, like closing costs, and if you’re not staying, they can really jack up what you’re paying,” says financial writer and editor Virginia Morris. Morris, co-author of several personal finance books including the Wall Street Journal Guide to Understanding Money and Investing, says renting usually is smarter if you’ll be moving every couple of years. That’s something to consider, for instance, if your job situation looks iffy or if you want to change employers.
 
Just how long is long enough depends on a number of factors, not just the price of the home, the closing costs and the interest rate on the loan, but also ongoing costs like property taxes, upkeep, and insurance, as well as the income you would get from investing money that would otherwise go into a down payment. And don’t forget the costs of selling a house, which include (but don’t end with) commissions paid to a real estate agent. As we’ll see below, you can plug all these numbers into a calculator to see how long it might take before you can “break even” on ownership vs. renting.
 
What’s my tax bracket? 
 
The mortgage interest deduction is one of the last real tax breaks available to most Americans. But it benefits some taxpayers more than others. Those in higher tax brackets get the bigger bang for their mortgage bucks. If you’re in the 33 percent federal bracket, for instance, you’ll pay just 67 cents after taxes for every dollar of interest. Taxpayers in the 10 percent bracket pay 90 cents on the dollar after the deduction. Owning a home may still be a good idea if you have a modest income (and have enough deductible expenses to itemize them), but the tax break is most dramatic for high earners.
 
Another tax break, though, is a boon to all homeowners, particularly those who don’t own million-dollar mansions. This is the exclusion from taxes (up to $500,000 for a married couple) of the capital gains from the sale of one’s main residence.
 
Do I really want the lifestyle? 
 
Strange as it may seem to the hard-core suburbanite, not everyone hankers for the responsibilities of owning a home. And you don’t have a landlord to complain to anymore. “I have a friend who gets out of the city and breaks out in hives at the thought of all that space,” Morris says. “He’ll never own a home.”
 
Ownership costs go well beyond cleaning the rain gutters and mowing the lawn. You’ll pay property taxes, which are tax deductible, and a number of non-deductible costs such as insurance and bills for utilities, sewers, and other public services. Then there’s the constant fight against wear and tear. Experienced homeowners know that repainting, re-carpeting, and the countless other repair and renovation tasks can cost a lot over time. One rule of thumb is to figure on average annual upkeep costs of about 1 percent of a home’s value. As a middle ground between renting and full-fledged home ownership, you might consider a condominium or co-op, which give you apartment-style or townhouse settings with an ability, as in single-family homes, to build up equity.
 
Equity is probably the biggest plus in owning a home. As a home increases in value over the years, your wealth increases as well, as long as you do not increase the amount you’ve borrowed on the home. But as everyone knows by now, home values also can fall and wipe out all your equity. Millions of homeowners have found themselves “under water”—owing more than their homes are worth. In addition to the widespread slump in housing of the past decade, home markets have also seen prolonged regional downturns in the past. And a poorly located home will lag even in a strong market.
 
To make the rent-or-buy decision, you first need to be able to buy; that means having enough money for a down payment. Then, you can weigh all the factors with one of the many web-based calculators designed for this purpose. Do some research, especially in your local housing market, because factors such as property taxes and appreciation in home values can vary greatly from place to place. 
 
Resources
 
Books:
 
Home Buying for Dummies, fourth edition by Eric Tyson and Ray Brown (John Wiley & Sons, 2009) has a chapter on the rent-or-buy decision.
 
On the Web:
 
For the National Association of Realtors’ current data (up to the most recent quarter) on median home prices by metropolitan area, go to http://www.realtor.org and click the “Research and Statistics” link. Then click “Metropolitan Area Prices.”

By Tom Gray
Source: Virginia Morris, editorial director, Lightbulb Press; National Association of Realtors

Summary

Consider:

  • How long you will be living there
  • Ownership costs

Not so long ago, just about everyone seemed to regard home ownership as a no-brainer route to wealth. If you were still renting, is was only until you could save up money for the down payment if you even needed one. The bursting of the 2000s real-estate bubble shook such assumptions to the core. For the period from 2006 to 2011, at least, renting looked like a much smarter investment than owning.

So is owning a home a bad bet? Only time will tell, but recent history has driven home the point that home ownership isn’t for everyone. If you’re thinking of buying a home for the first time, you need to ask some questions—about finances, future plans, and lifestyle choices. Here are some of the most important ones:
 
How long will I be staying? 
 
Owning a home can be a profitable investment in the long run if your timing is right. But if you’re not ready to put down roots, you can lose a lot of money. “Buying (a home) has some not-so-hidden costs, like closing costs, and if you’re not staying, they can really jack up what you’re paying,” says financial writer and editor Virginia Morris. Morris, co-author of several personal finance books including the Wall Street Journal Guide to Understanding Money and Investing, says renting usually is smarter if you’ll be moving every couple of years. That’s something to consider, for instance, if your job situation looks iffy or if you want to change employers.
 
Just how long is long enough depends on a number of factors, not just the price of the home, the closing costs and the interest rate on the loan, but also ongoing costs like property taxes, upkeep, and insurance, as well as the income you would get from investing money that would otherwise go into a down payment. And don’t forget the costs of selling a house, which include (but don’t end with) commissions paid to a real estate agent. As we’ll see below, you can plug all these numbers into a calculator to see how long it might take before you can “break even” on ownership vs. renting.
 
What’s my tax bracket? 
 
The mortgage interest deduction is one of the last real tax breaks available to most Americans. But it benefits some taxpayers more than others. Those in higher tax brackets get the bigger bang for their mortgage bucks. If you’re in the 33 percent federal bracket, for instance, you’ll pay just 67 cents after taxes for every dollar of interest. Taxpayers in the 10 percent bracket pay 90 cents on the dollar after the deduction. Owning a home may still be a good idea if you have a modest income (and have enough deductible expenses to itemize them), but the tax break is most dramatic for high earners.
 
Another tax break, though, is a boon to all homeowners, particularly those who don’t own million-dollar mansions. This is the exclusion from taxes (up to $500,000 for a married couple) of the capital gains from the sale of one’s main residence.
 
Do I really want the lifestyle? 
 
Strange as it may seem to the hard-core suburbanite, not everyone hankers for the responsibilities of owning a home. And you don’t have a landlord to complain to anymore. “I have a friend who gets out of the city and breaks out in hives at the thought of all that space,” Morris says. “He’ll never own a home.”
 
Ownership costs go well beyond cleaning the rain gutters and mowing the lawn. You’ll pay property taxes, which are tax deductible, and a number of non-deductible costs such as insurance and bills for utilities, sewers, and other public services. Then there’s the constant fight against wear and tear. Experienced homeowners know that repainting, re-carpeting, and the countless other repair and renovation tasks can cost a lot over time. One rule of thumb is to figure on average annual upkeep costs of about 1 percent of a home’s value. As a middle ground between renting and full-fledged home ownership, you might consider a condominium or co-op, which give you apartment-style or townhouse settings with an ability, as in single-family homes, to build up equity.
 
Equity is probably the biggest plus in owning a home. As a home increases in value over the years, your wealth increases as well, as long as you do not increase the amount you’ve borrowed on the home. But as everyone knows by now, home values also can fall and wipe out all your equity. Millions of homeowners have found themselves “under water”—owing more than their homes are worth. In addition to the widespread slump in housing of the past decade, home markets have also seen prolonged regional downturns in the past. And a poorly located home will lag even in a strong market.
 
To make the rent-or-buy decision, you first need to be able to buy; that means having enough money for a down payment. Then, you can weigh all the factors with one of the many web-based calculators designed for this purpose. Do some research, especially in your local housing market, because factors such as property taxes and appreciation in home values can vary greatly from place to place. 
 
Resources
 
Books:
 
Home Buying for Dummies, fourth edition by Eric Tyson and Ray Brown (John Wiley & Sons, 2009) has a chapter on the rent-or-buy decision.
 
On the Web:
 
For the National Association of Realtors’ current data (up to the most recent quarter) on median home prices by metropolitan area, go to http://www.realtor.org and click the “Research and Statistics” link. Then click “Metropolitan Area Prices.”

By Tom Gray
Source: Virginia Morris, editorial director, Lightbulb Press; National Association of Realtors

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