David Lerner Associates: Should You Buy or Rent Your Home?
This put many homeowners “underwater” on their mortgages — in other words, they owed more money on their mortgages than their homes were worth. Today, however, real estate prices are starting to rebound in some parts of the country.
The S&P/Case-Shiller Home Price Index, the leading measure of U.S. home prices, posted an increase of 7.3 percent for 2012. Given this, some people who are currently renting are thinking about buying a home. Whether or not this a good idea for you depends on your answers to several questions:
1. How much would a mortgage payment be compared to your rent payment?With home prices still down from their pre-crash peak in many areas of the country and mortgage rates at historic lows, it’s possible that your monthly mortgage payment could actually be less than your rent. This depends, of course, on the price of the home you intend to buy.
When making this determination, remember to factor the cost of real estate taxes and homeowner’s insurance into your calculation. Many times, these costs are added to the monthly mortgage payment and held in an escrow account — the mortgage servicer then pays the taxes and insurance when they are due.
2. Can you realize tax benefits from home ownership?Home mortgage interest and real estate taxes may be deductible on your federal income tax return, which decreases the effective mortgage interest rate. Whether you can realize this potential tax benefit depends mainly on whether you itemize deductions or not.
You must itemize in order to deduct your mortgage interest and real estate taxes on Schedule A — they are not deductible if you claim the standard deduction. For the 2012 tax year, the standard deduction will be $5,950 for singles and married couples filing separately, $8,700 for heads of household, and $11,900 for married couples filing jointly.
3. Have you considered the lifestyle implications of owning a home?The rent vs. buy question goes beyond just dollars and cents — you must also factor in lifestyle considerations and costs. When you rent and the air conditioner or furnace goes out, you probably just call the landlord to get it fixed. The same thing goes for most other repairs and maintenance — from minor annoyances like a leaky faucet to major jobs like a new roof or exterior painting or siding.
Not so if you own your home. If you’re the handy, do-it-yourself type, you might consider doing repairs and maintenance like this yourself to save some money. The same goes for yard work, landscaping and other home improvement projects. But if you enjoy recreation, hobbies or just relaxing during your free time, renting might be a better lifestyle choice for you.
Another factor to consider is the fact that when you own your home, a portion of your monthly mortgage check may go toward paying down your loan principal (as opposed to the portions that go toward interest and escrow). If so, you may be building equity in your home. But when you rent, the landlord reaps the potential benefits of equity.
However, there’s no guarantee that paying down principal will result in equity, as the real estate crash demonstrated. If your home’s value falls in the future, your equity could be wiped out and you could end up owing more on your mortgage than your home is worth.
Carefully consider each of these and other factors as you decide whether renting or buying a home is the right choice for you.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates,Inc. (DLA). This material does not constitute an offer or recommendation to buy or sell securities and should not be considering in connection with the purchase or sale of securities. Member FINRA & SIPC.