Don’t ask this question to your parents, you’ll get the same answer and it might even invoke a bit of anger. Buy a house instead of renting because you’re just helping pay for another person’s mistake is something similar to what you’ll probably hear. While it makes perfect sense that you’ve got nothing to show for a house after living in it for two years, is this statement always true? Oftentimes the monthly cost for a mortgage will be a couple hundred bucks less than it would cost to rent out the place. But it is a long-term decision including enormous responsibility. We hear about the housing bubble pre-2008 bursting and sending millions of people into debt and housing foreclosures. Here is a tool you’ll be able to use to assess your specific situation and judge for yourself if renting or buying is the right decision.
Many will argue renting is throwing money out the window because you’ve got no long-term value coming back to you after paying rent each month. This is true, you don’t. Not only are you throwing money away solely on the cost of rental, but there are also a couple other costs associated with this. Small maintenance such as damage you may have caused to the house (holes in the wall, carpet replacement or cleaning) and utilities such as water and power. This is money you don’t get back.
But owning property also includes similar costs. For one you’ve got the interest on your mortgage. Let’s take a $165,000 house on a 30-year mortgage. Let’s set the interest rate at 4.5% and not factor in the property tax or private mortgage insurance. Assuming you made all payments for those 30 years, you’ll have paid $139,000 in total interest. What do you have to show for that interest after all that is said and done? Nothing. In addition, you’ll pay property taxes (how and when this is paid depends on where you live). Every once in a while large maintenance expenses will add to the cost. Things like roof repairs, kitchen renovations, replacing water heaters, furnaces, garage doors, large appliances… the list goes on. Add utilities onto that and the point is house purchases also include these “throwaway” costs.
The issue of throwaway money is complicated when you own a house, because you can’t choose to walk away if the cost turns out to be too high. After making the decision to purchase a house, all costs associated with that house are yours to bear as well. With a rental, you can walk away (with a lease cancellation fee or at the end of a lease) if the cost to live there turns out to be too high. You aren’t saddled with mortgage payment and all associated costs, which make slipping into substantialmortgage debt that much easier.
Mortgage Interest as a Tax Shelter
After reading the above paragraph it may seem as if the long-term costs associated with owning a home are much higher than renting – and greater responsibility. But don’t forget about “Home Mortgage Interest Deduction.” If you make $50k a year and paid $10k in interest on the mortgage you can write this off as a tax deduction. This is basically telling the IRS that you only made $40k a year and then thatamount is taxed, lowering your annual taxes paid. Let’s say the tax rate is 25%. 25% of $50k is $12.5k. With the new tax sheltered amount ($40k) and paying the same 25% in taxes you pay $10k in taxes, for a difference of $2.5k just for making your monthly mortgage payments.
Firmly Planted or Freely Floating?
Buying a house is an intelligent investment if you plan to live at that location for 7 years or more. If you’re set with career job in this location with no intention of moving in the near future it is likely better to buy a home instead of renting (assuming houses of inclusive equal value). If you’re young and aren’t sure about the city you currently live in then renting is a smart decision until your future path demonstrates greater stability.
The House is an Asset
Materialistic people have some trouble with this one. People assume once a contract is signed and you agree to buy a house, that house is “theirs.” And it is, assuming you don’t lose your job or go into financial debt. But a house is only an asset when it is fully paid off. Until then, it is a liability and a significant one at that. Just be sure to remember this before telling everyone and their brother that you own a house when in fact you merely began making payments on the house.
It comes down to where you’re at in regards to your career, if you plan to stay in the area for 7 years or more, and if you want long-term value to the money you are shipping out each month. While older generations will always tell you owning a house is a much better investment than renting, the decision is subjective and never uniform. You don’t want to buy a house because it’s cheaper than renting on a month-to-month basis. This is a benefit but should not be the determining factor. A house is not only an investment, it is also a responsibility. Houses can be good investments if done intelligently or really bad investments if done without proper foresight and due diligence. Most houses appreciate over time and owning one allows some interesting tax incentives, in addition be becoming a long-term member of the community. Should you purchase a house? That’s for you to decide, but the answer isn’t quite as cut and dry as it was say, 20-30 years ago.
Gale Newell has spent the entirety of her career in the finance industry. She writes about personal finance, debt relief, financial planning, and budgeting. Between her time sleeping or working, she finds herself catching up on episodes of Vikings or running along the banks of a peaceful river with her dog, Tuco.