Welcome To NJHOMETEAM.COM - Is it better to rent or buy real estate?

Karen B. Lawrence NJHOMETEAM

Should I Rent or Buy?

I don't think I can afford to buy

Current mortgage rates are at a 15-year low. Lower interest means lower monthly payments that you can lock in now for the life of the mortgage.

Especially if you are a first-time home buyer, you can find a mortgage that requires only a 3% down payment. On a $180,000 home, that amounts to $5,400. So what are you going to do with your income tax refund this year?

Speaking of taxes, you might be surprised to find out that in many cases, renting can cost you more than owning. See the example below.

I have poor credit

Because a credit report might be the only tool a landlord has to make an evaluation, a poor credit report may hurt you more as a renter than it does when you apply for a mortgage, because a mortgage lender can employ other means to help in making a decision. Remember that the mortgage companies are in business to lend money against the value of a home, not to turn you down if they can help it.

If you have problems with your credit history, the time to start repairing it is now.

I don't want all of the maintenance responsibility

Condominium ownership might be best for you. You have most of the financial and security benefits of ownership, but most maintenance/upkeep issues are handled by the owner's association, to which you pay monthly dues for shared services such as landscaping and snow removal. You don't have these costs with a detached single-family home, but you do get to mow the lawn and rake the leaves and take out the trash.

Why Buy?

Equity

Buying a home builds equity; renting does not. After paying rent for 30 years, you would have a rather large box full of rent receipts. After paying a mortgage for 30 years, you would have a home—free and clear.

When you buy a home—with a fixed rate mortgage anyway—your principal and interest mortgage payments normally remain the same. That's not necessarily the case with rent. You see, rent costs tend to rise with inflation.

Tax Advantages

There are some significant tax advantages associated with home ownership such as the ability to deduct property taxes and interest on the mortgage.

Consider the hypothetical case of Fred and Phyllis Morrison. The Morrisons just bought a house with a $107,500 mortgage and a 7.5 percent interest rate. Let's compare the costs of owning a home vs. renting a similar property. This example assumes a $750 per month rent payment for comparison. There is no tax deduction for renting, so this $750 figure represents the true cost of renting.

Fred and Phyllis Morrison
Household Income: $55,000
$107,500 Mortgage at 7.5 Percent Interest
28 Percent Tax Bracket

Renting Owning

Monthly Rent $750.00 Monthly Mortgage Payment $751.00

Tax Savings 0.00 Tax Savings -187.00

Total Cost $750.00 Total Cost $564.00

Tax Savings: $187 per month; $2,248 per year

This hypothetical example assumes that the Morrisons would pay a total of $8,029 in mortgage interest this year, and that they are in the 28 percent federal marginal income tax bracket. State taxes, property taxes, and any mortgage points paid are not considered in this example but are also deductible from your income tax.

Their mortgage payment is $751 per month. Because they can deduct the interest paid on their mortgage, they will receive a tax savings this year of $187 per month, effectively reducing their mortgage cost to $564 per month.

If we factor in the property tax deduction (and points paid at closing), the Morrisons' tax savings would be even greater.

Security

There's nothing like the feeling you get when your Realtor® hands you the keys to your own home. When you own your home, you're in control. Paint the den. Wallpaper the bathroom! Remodel the kitchen! Or just watch television in your own living room.

© njhometeam.com 2003

Renting		Owning
Monthly Rent	$750.00	Monthly Mortgage Payment	$751.00
Tax Savings	0.00	Tax Savings	-187.00
Total Cost	$750.00	Total Cost	$564.00