Times have changed. Most of us grew up in families that considered home ownership the ultimate American dream. Whether or not that dream was realized, the wisdom of buying your own home was not questioned. It seems that, more recently, people have been re-examining the benefits of buying a home instead of renting and when is the best time to do so.
I recently met with a professional couple in their 30’s who are in a financial position to purchase a home—they have excellent credit, not too much debt, a stable income, and adequate savings. They expressed some uncertainty about whether a home purchase was the best use of their money. The answer is that it depends. Arguments can be made for buying and for continuing to rent, depending on your particular circumstances.
If you in a position to purchase a home, but are wondering if it's the right time to move from renting to buying, here are some questions that may help you evaluate your situation:
How long do you plan to stay?
The process of buying and selling a home involves many different costs in addition to the purchase price and mortgage interest. It’s a good idea to remain in a house long enough for its value to appreciate sufficiently to offset all the costs. A minimum of three years is recommended to make the investment financially sound. Aside from absorbing the closing costs of buying and selling a home, you will also pay capital gains taxes on the sale if you hold it for less than two years.
Do you know the actual tax savings?
Too many home buyers believe that any additional costs of home ownership will be offset by the mortgage interest deduction on taxes. For many buyers who purchase homes at or below the median price, the mortgage deduction may not add enough to the standard deduction to allow them to receive the deduction. Further, even if you purchase an expensive house with a large monthly mortgage payment, your tax benefit may be less than anticipated. A typical mortgage amortization schedule dedicates most of the monthly payment to interest in the first several years of the loan. Gradually more of the amount is applied to the loan’s principal and less to the interest, resulting in a dwindling tax deduction.
Are you counting on price appreciation?
People used to assume that home prices always rise each year, but that is no longer the case. The bursting of the housing bubble that started in 2007 resulted in declines in home prices. Today potential home buyers are advised to anticipate slower increases in value. Are homes still considered a wise investment? It depends. It is always advisable to maintain a diversified investment portfolio rather than into a single leveraged asset (your home). Also, if your mortgage payments are burdensome, you may be taking resources from other commitments like retirement and college tuition.
How much is your rent payment actually costing you?
We all are familiar with the argument that homeowners are building equity in a valuable asset, while renters are simply spending money each month. The comparison is more complex. Making an accurate comparison of the financial impact of renting versus buying has to factor in the total costs of homeownership. One strategy is to consider which option would have a more significant positive impact on your overall wealth at the end of your stay.
- Say you pay more for your monthly costs of ownership than you would for rent. Compute the amount that difference would earn invested in a diversified portfolio and compare it with the home equity you will build in mortgage payments during the same time.
- Another strategy is to use a “rent vs. buy” calculator to help you determine the long-term difference in cost. That way, your decision to buy or to keep renting can be made with confidence that your choice is financially sound.
Your investment in your home - real estate - should be only one part of your total wealth management strategy. An independent financial advisor can help you make sure that your financial plan is efficient and propelling you towards your wealth goals in the best possible way. Have questions? Get in touch today!
Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.