Owning your own home is part of the American dream. But according to a recent Wall Street Journal article, owning a home is not always the best idea.
Some Americans who cashed in on the $8,000 first-time home buyers credit before it expired in April 2010 got a bad deal. The credit pushed up sales prices, which then dropped dramatically when the buying frenzy ended.
So is it better to rent a home than buy? That’s not always the case, either. Let’s look at the tax benefits for a residential homeowner.
Consider a Midwestern family of four who bought a three-bedroom house they could afford. Suppose they got a thirty-year, $200,000 loan with 4.5 percent interest, for a monthly payment of $1,015. Add in an estimated average property tax of $1,625 and insurance of $1,200 per year, and the total annual lodging expense would be around $15,000—or $1,250 per month.
In this scenario, $13,500 worth of mortgage interest and property taxes would be deductible. Folks in a combined federal and state tax bracket of 30 percent would save $337.50 per month. After taxes, that home would cost them $912.50 per month.
How much would a similar home cost to rent? Looking at the area around Chicago, Ill., we can find two- to three-bedroom homes available for around $1,500 per month. Taking into consideration the tax benefits for homeowners, renting a home would have cost the family $7,000 more per year than owning one.
Even after a drop in value within the first year, the family came out just about even between renting and buying. Families who buy homes they can afford tend to stay in those homes for a decade or more. In the long run, the prices rise, and the loan balance declines. When they get ready to sell in ten to thirty years, they walk away with a profit.
People who select homes where the monthly mortgage, property tax, and insurance payments are no more than 15–30 percent more than their rent will always fare well in the long run.
So—Rent or Buy?
The answer is different for every family, in every market. With interest rates the lowest they’ve been in generations, it’s certainly worth looking for a home to buy. The time may never be better than it is right now.