The Goodies of Homeownership
Before we get started take a minute to use our "Rent vs. Buy" Calculator. After you finish this course, we'll look at it again and you'll have a different perspective on your options.
As you know, there are some perks to owning:
1. Tax Breaks
If buying a home gives you a strong dose of sticker shock, you're not alone. Many homebuyers feel the same way about making a down payment and monthly mortgage bills. Don't worry, someone's on your side�Uncle Sam!
A number of federal tax deductions are designed for you as a homeowner to make the costs easier to swallow. You don't qualify for these tax breaks as a renter. Don't forget to calculate tax savings when deciding whether or not to own, or how much you can afford. Three major items are deductible from your federal income taxes:
These are substantial tax deductions-just the mortgage interest alone is a hefty, annual tax break. A hypothetical homebuyer, who takes out a 30-year loan for $120,000 at 7.5 percent interest, pays $8,957 in mortgage interest the first year. That's a potential tax deduction of nearly $9,000. You also might be eligible to deduct the purchase points for the year of your purchase. This is definitely something to look at when upgrading your home.
One purchase point is equal to one percent of the loan amount, in this case $1,200. Remember, however, that you cannot deduct your homeowner insurance, or loan processing fees, or private mortgage insurance (PMI). If you're renting and you don't itemize on your tax return now, it might pay to own a home from a tax standpoint. The more your home deductions exceed the 1999 standard deduction of $7,200 for married couples filing together or $4,300 for single filers, the more it makes sense to own. In the example above, our hypothetical homebuyer is already beating the standard deduction with more than $9,000 in tax deductions. Remember also to factor in non-home related deductions, such as charitable contributions, state income taxes and other deductions available when you itemize. And don't forget that the larger the home mortgage payments, the larger the deduction. If you are upgrading your home, your tax benefit will also increase.
2. A Place to Call Home
Nothing beats putting your feet up and thinking, "I own this place." You just can't put a price on the feelings of satisfaction and permanence that come from owning your own home.
It comes from things like the freedom of being able to renovate or decorate your home, which is normally not available to you when you rent. If you do rent and your landlord allows renovation and major decorating (such as painting) as part of your leasing agreement, ask yourself if there is any benefit in investing in a property that you don't own.
Why spend your money to enhance your landlord's property? Why not invest in a home you own? As a homeowner, you can recoup some of your investment when you sell. As a renter, your renovation dollars are thrown away. The other advantage of being is a homeowner is the ability to put down more permanent roots in the community. If you value these things, or if you're planning to start a family, the values of home ownership make the bottom line look better.
3. Savings
This is where home ownership beats renting hands-down, especially on a long-term basis. You can spend thousands over the years on rent with nothing to show for it except a pat on the back from your landlord. By contrast, paying your monthly mortgage is a type of savings plan, which over time will accumulate into what lenders call "equity," the financial ownership interest in your home. You can reinvest your equity by borrowing against it and obtaining a home equity loan or second mortgage. That puts your money to work for anything from remodeling to investments to paying for your child's college education.
4. Appreciation
Another goodie to owning a home is getting a potential return on your investment. Homes typically appreciate, or increase in value over time, resulting in a return on your investment if you're willing to own and maintain your property for a number of years. On a national basis, house prices have grown an average of 5 percent per year in the late 1990s.
What does that mean for you in dollar terms? Let's say you buy a $125,000 house, and that house appreciates to $150,000. That equals $25,000 or a 20 percent return on your investment. Being able to write off your mortgage interest payments and other costs on your taxes sweetens the deal. As a renter, the only investment involved is your landlord's which he supports by pocketing your monthly rent check.
Tradeoffs of Home Ownership
As you already know, it's not all good stuff when you own though.
1. Financial Responsibilities
Naturally, there are financial obligations to purchasing a home, too. Although renting is a relatively carefree existence, homeownership involves a long-term financial commitment, not only to monthly mortgage payments but also to utilities, insurance, and maintenance and repair costs, as well. Your monthly payments as a homeowner may be higher than rent you're paying now, not to mention the up-front costs of making a 5-10% down payment plus closing costs.
You don't need to be terrified of the costs, just realistic, especially when it comes to deciding how high you can go. Try not to put the squeeze on your budget or your peace of mind. You don't want to spoil the fun or satisfaction of owning your home, whether it's your first or your last. If the home of your dreams is a budget buster for you, stay where you are or rent for a while till you're in a better position to buy it.
2. Being Tied Down
We're talking about not being able to pack your stuff and leave in a month's notice, which you can do as a renter. You will
also seem more tied to the property than you would a home you've lived in for years. One tradeoff to owning a home is decreased mobility. Let's say you live in Miami and your heartthrob is in Memphis, and you're tired of the long distance relationship. You don't want to be sitting on a mortgage when it's time to go live with your beau. Or perhaps you're in the military. Or your company might transfer you to a different location. If you expect to move in the next year or two because of a job change or some other personal reason, think about postponing buying a home. Try to commit to owning for at least five years, to allow your investment to appreciate. If you're footloose and fancy free, renting is a better idea.
3. Upkeep
Pull out the tools! Don't forget that certain things you took for granted as a renter (or condo owner) are now your responsibility as a homeowner. Mowing the lawn, pulling up weeds, fixing the leaking faucet, replacing the roof� the buck stops with you. This is a time commitment on your part. That's why some people choose to buy into a condominium, to minimize the expense and hassle of upkeep. As a renter, all you had to do was call the Super to fix what was broken. As a homeowner, the burden for the repair is on you.
4. Negative Equity Risk
Owning a home is an investment, and no investment comes without risk.
The opposite of appreciation is depreciation when a home actually loses its value. If the real estate market takes a turn for the worse and home values fall, you could lose money on your investment. No one can accurately predict what the economy will do years down the road, so there's always some risk involved in real estate, especially if you buy during an upswing when home values are high. Try to minimize your risk by buying the right home when prices are low to moderate for the neighborhood and will likely rise.
5. Foreclosure
Foreclosure results when you fail to keep up your mortgage payments, even for reasons beyond your control, and the lender sells your property.
This results in the loss of not only your home but also your investment and your good credit rating. Actually, this nightmare probably shouldn't even happen in your dreams, especially if you complete this course successfully and make the right financial decisions. Of course, it never hurts to consider the worst-case scenario.
Stop and ask yourself how stable your current financial situation is. If you're in a stable job you'll probably decide it's worth the risk. Renting is definitely safer, however, whenever you're worried about taking on major financial obligations. So is staying in a home you can easily afford instead of extending yourself for that dream home.
3, 2, 1� Blast Off!
So, you've balanced the pros and cons of homeownership and staying where you are versus going for a larger place, and you're still feeling full of verve and vinegar, ready to march off in search of your own private paradise?
Good! Let's figure out approximately how much you can afford.
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