The question of whether to buy a home or continue renting used to be a no-brainer.
Proponents of home ownership typically say you should buy and take advantage of the historical trend of home price appreciation – not to mention the tax break from mortgage interest deductions. But the Great Recession blindsided thousands of Americans and home prices (gasp) actually fell.
If you talk to 10 people about whether you should buy a home or continue to rent, you’ll probably find five on one side and five on the other. But to answer the question of when should you buy a home, you’ll need much more information to get a valid answer.
The conventional wisdom
People who argue for buying a home will point out the benefits of locking in your cost of housing and building equity in a real asset. They will tell you over any 20-year period in history, home values in the U.S. have increased.
They may also point out that home ownership tends to have other benefits, like contributing to a higher overall credit score, since mortgages are considered installment debts like student and vehicle loans.
But as with everything, there are two sides to the story.
While it’s true the money you pay in rent is money in someone else’s pocket, let’s make a straight across comparison.
Your monthly mortgage payment is almost entirely interest for at least the first 10 years of home ownership. In other words, money in someone else’s pocket. Not to mention there are additional costs when you own, such as taxes, insurance, maintenance and other expenses.
As for the price appreciation argument, homes averaged a 6.4 percent increase in value every year between 1968 and 2004. And don’t forget home price appreciation is only “on paper,” meaning you really aren’t getting richer unless you sell – and even then you’ll be paying taxes on your gains.
If you have bad credit, buying a home may be especially difficult. You could try securing a subprime home loan to increase your purchasing power, but be aware of the consequences if your new home’s value decreases over time.
The bottom line
There’s the tendency for homeowners, as the value of their homes increases over time, to take money out in the form of home equity loans and lines of credit. This gets expensive because not only are they reducing their equity, but they’re also paying interest to do it.
Everyone’s financial situation is different. In many cases, it makes more sense to buy a home rather than to rent. Depending on where you live in the country, it can actually cost less to own than rent a home. And with mortgage interest rates still near all-time lows, it’s cheaper than ever to own. A good home loan will make it much easier if you don’t have the cash to pay for an entire house upfront.
The bottom line: Whether to buy or rent a home is a personal decision dependent on many factors. Talk to an accountant in your area familiar with real estate transactions and taxes. He or she should be able to advise you on the best decision for your situation.
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