I am sure many of you have made the move from apartment living to home living sometime in your lives. I know there are certain advantages to home ownership (i.e. you can paint your interior walls puce with mauve polka dots if you want to).
However I am approaching this question purely from a financial perspective.
When you paid rent, renters insurance was a lot less expensive. You also didn’t have to worry about hiring plumbers, heating & AC repairmen, or kitchen appliance repairmen. You didn’t pay for trash removal, lawn care, or snow removal.
Now that you own a home, homeowners insurance is more expensive. You also have to deal with mortgage payments, trash removal, and property tax. When something breaks, you have to pay for someone to fix it. You also are responsible for your own trash removal, lawn care, and snow removal.
When you add up all your bills and tax for home ownership, and subtract out the equity you build & tax savings: How much money did you save (or lose) compared to when you paid rent?
Short term, renting is cheaper. No argument there.
Long-term it’s a little more problematic. Let’s say you pay $100,000 for a house and you finance it with a 30 year mortgage. In terms of dollars out of pocket every month your house payment would be roughly equal to your rent payment.
But yes, you’ll have to worry about maintenance, cable TV charges, trash pickup and all that other stuff your landlord builds into the rent payment.
If you keep the house a year, then sell it, the amount you’ll receive will barely pay off the mortgage. (If it’s a down market, you could actually owe more. But if you keep the house 30 years, that means the mortgage is completely paid off, and the house has probably appreciated considerably over time. It’s not unusual for people to have paid $25,000 for a house in the 50s or 60s, and sell it 30 years later for $125,000 or more, and that doesn’t include the tax breaks. That pays for a lot of maintenance over the years.
Of course, if you decide to live in the house for 40 years, you’ve gotten ten years essentially rent-free, plus even more appreciation, so you really make out.
If you are going to live in the same place more than 5 years buy a house. If you are going to move in less that 5 years rent. That’s a good rule of thumb.
Well, I will give you a real world case that I am did.
I rented for 10 years. I had to because of necessity at the time, I got transferred a few times and had to move from city to city, so it never paid to by (I like that 5 year ROT by the way) However, in the past year I go married and we settled down and bought a house.
I was paying $700 per month rent (2 bedroom)
I was paying $45 per month for TV
I was paying about $50 per month for power
That was about it…about $800 per month for apt living.
Bought a $130K house. I pay $416 bi-weekly. That includes our life insurance and other crap. A person could probably get it down to $400 per month…that is over a 20 year period.
On top of that, you still have TV, Water, Power, Gas, dah-da-daah! TAXES! (About $1800 per year) and all the other household expenses that you never budget for…but probably comes out to $40 per month (some months nothing, others $150. Even if you have a brand new house)
So, beyond a shadow of a doubt the house costs you more. However, if you have a spouse and split it, it is cheaper to by a house that pay for 2 rentals (say if you were living apart, got married and bought a house like I did).
If you can afford it and don’t plan on moving soon, do yourself a favor and by the place. In the long run, that is the best thing you could do for yourself.
One BIG advantage to homeowning: mortgage interest is tax-deductible.
Last year, I bought a house. I’ve got a 30-year mortgage at 8.125 percent. That means that this year, I’ll get to deduct almost $10,000 from my taxable income. Renters don’t get to do this. Also, property tax is deductible; depending where you live, that could also net you a nice income tax break.
If your income stays the same, you’ll pay a substantially lower tax bill (or get a better refund) if you own a house vs. renting an apartment.
It depends on how you look at it. If you rent, your landlord gets to deduct interest on his mortgage, so doesn’t need to charge you as much in rent.
This subject is one of my peeves. Many people think that the home mortgage interest deduction is some kind of giveaway to encourage home ownership. It isn’t. Anytime you borrow money to invest it elsewhere, the interest on the money you borrow can be deducted, to balance the income from the money you’ve invested.
Any rational tax system which taxes interest that you make must also let you deduct interest you’ve paid out. So if I borrow money from a bank at 7% interest, and turn around and loan it to you at 7.5% interest, I make a 0.5% income. This part is taxable, because it’s the leftover when you subtract the 7% I pay out from the 7.5% that I’m making.
Here’s another way to look at it. If I owe $50000 on my mortgage at 7%, and I have $50000 in a savings account earning 6.5%, should I pay off the mortgage? Keep in mind that I get a tax “break” for the mortgage. The answer is yes - I would be better off paying off the mortgage in this case.
All tax proposals in the US which do away with the home mortgage interest deduction also do away with taxes on any interest income. It would be a government-imposed imbalance to have one without the other, and in general you don’t want tax policy to be a factor in investment decisions.
I’m also looking into buying a house. And, it will definitely be more expensive, I know that. But, you must consider that when you own a home, you are making an investment. If you have to make repairs or renovate, you are improving your investment.
I live in an area where the real estate market is still zooming through the roof. I’m itching to get a house while I can still afford it.
Don’t forget the increased space you have with a house. Sure, you may pay $800 a month on your mortgage, but the house is probably 2-3x the size of a $700/mo apartment in the same city. My parent’s house is about 2600 sq ft, and they pay about $790/mo (almost paid off). My apartment is $735/mo, 2 bedroom, 1200 sq ft. Plus the house usually comes with your own YARD, garage, and privacy.
Dunno where you live, but in my area rent is basically whatever the market will bear. That figure bears no resemblance to the tax break landlords get. Besides, I believe the tax breaks on rental properties are different than those for primary residences.
Uh, no. At least, your answer should be qualified on the type of mortgage you have. If you have a standard 30-year mortgage, and you’ve only had it for a very short time, almost all of your mortgage payment is interest. In the example you quoted, the first year of the mortgage you’ll pay a total of $3,991 to the mortgage company. Of that, $3,480 will be interest, and will be deductible. Your investment will earn $3,250, which is taxable. However, the $3,480 deduction will more than offset the income made on the savings account. So paying off the mortgage in this instance, at least in the first year, would be a bad move. Better to wait until the mortgage interest is less than the amount earned by the savings account, then pay it off.
If you don’t take into account possible tax consequences when making investment decisions, you’re making a HUGE mistake … one which could come back to cost you big-time later.
Your numbers are right, but you reach the wrong conclusion. If you owe $50000 on a mortgage at 7%, then you will pay (.07*50000)=$3500 in a year in mortgage interest. Your figure is slightly lower because you would really pay the principal down a little, but close enough. On the savings account, you would make $3250 as you say. The mortgage interest is deductible, but the interest on the savings account is taxable.
So my taxes by paying it off would be higher by my tax rate times the $250 difference. But that $250 would be in my pocket, so paying tax on it is something I’m willing to do. You would be better off in this case by taking the money out of savings and paying off the mortgage. Of course, I’m not considering the value of having your money liquid, just the bottom line.
Yes. The mortgage interest tax break applies only to a primary residence, and you can only take it on one residence. I don’t believe rental properties receive any tax break, though I would agree with CurtC that it makes sense that it should.
The “home mortgage interest deduction” that you get to put on Form 1040 Schedule A is indeed only for interest on your primary residence. However, a landlord is in business, and he gets to deduct the interest he pays on the apartment complex’s mortgage from the business’s income, just like any other business expense. Same thing, different form.
And it’s true that, like in any market, the price is what the market will bear, but what the market will bear is inextricably linked to the price that a supplier must pay for what he sells.
Buying is almost always the better deal, unless perhaps you live in someplace like Manhattan…and you have a rent-controlled $700/month 3 bedroom flat on the Upper East Side…
I live in the SF Bay Area. From 1990 to 1998 I rented a an apartment in the Haight-Ashbury for $1100/month, and I paid my gas & electric (another $70/month). That was considered cheap for a 2 bedroom apartment in SF. Over 8 years I paid about $105,600 to my landlord, who used this sum to pay of his mortgage on the building.
Two years ago, I bought a 3 bedroom home in Emeryville (just over the Bay Bridge) for $135,000 with 20% down and an 8% 30-year mortgage. My monthly payments are about $800, and all the interest is tax deductable. At my income, I get about $8,000 back on my federal and state income taxes. My monthly utilities bill is about the same as it was before (the house is bigger than my apt, but I’ve equipped it with energy efficient lighting and appliances).
Water and garbage bills add about $75 per month. Property tax is about $2000 per year (also tax deductable). Homeowners insurance is about $800/year, but guess what…I get a great discount on my auto insurance because my home and autos are insured by the same company.
Furthermore, I apparently lucked out at getting my house for $135K when I did…due to the crazy market here, it’s worth about $300K now…
So, the fact is that in my case buying my home was overwhelmingly better than renting. And besides the obvious financial benefit to owning vs. renting, there is the psychological benefit that I don’t have to worry about my landlord raising my rent or kicking me out onto the street for whatever reason. This is a sighnificant concern here in the Bay Area.
I went from renting a house for $650 a month plus all the bills to buying the house I was renting. I now pay $400 a month plus all the bills. This is just a starter type house though. Soon I am getting married and then we will have two houses, one to rent and this one to live in, after a bit we will build a new home and rent both of our current houses out paying for the two mortgages. (one house is already free and clear). So we will be breaking even at least with three houses until mortgages are paid off then we will have a good $1000 a month income extra. That’s the plan anyhow.
The US gov has a plan for those with low incomes to purchase houses. The person pays about one third of their income & the gov pays the rest & gets it money back if the house is sold later. This gives people a $250 a month mortgage.
Hawaii was also pretty generous for them. A deaf person got 14 acres of land from the government & a house & as long as they live it in, they get it for free, I think. But it was near the lava areas.
So let me get this straight. In my scenario, at the end of the first year, I’ve got $53,250 in savings, and the interest I earned is basically untaxed, because of the deduction from the mortgage interest. In your scenario, I’ve got no mortgage, and my savings account is wiped out.
Now, year two rolls around. In my scenario, I choose to pay off my mortgage. That leaves me with $3,250 in savings and no mortgage. Essentially the same scenario you proposed, but I’ve got money left in my savings account. Had I simply paid the mortgage payment to myself during the year, to bolster my savings account, I’d have tax implications on that money. In both scenarios I wind up with the same house, but by postponing the actual buying of the house I’ve saved myself some money.
But look at it from a real-world perspective. Most folks don’t have the cash necessary to just write a check for a house. Given the question of the OP, in most cases it makes more sense to buy than rent, if you have the financial option to do either.