Last Updated: August 24, 2009
At one time, owning a home was the American Dream. Now, however, that dream is changing. Yes, more than nine in 10 Americans do believe that owning a home is still a good investment, according to a recent survey. However, the Obama administration now plans to use $4.25 billion of stimulus funds to spur the rental market for lower income families, according to published reports.
And that — combined with recent changes in the housing market — begs the question: Should you rent or buy a home? What should you examine when thinking about that question?
"This is always a difficult decision, and it is no surprise that families take a long look at which option is best for them," said FPA member, Michael A. Branham, CFP®, a financial planner with Cornerstone Wealth Advisors. Here's what he said you should consider:
- Don't forget to look at the actual costs of either decision. While it may seem easy to compare your monthly rent payment to your potential mortgage payment, be sure it is an apples-to-apples comparison. For example, make sure the "buy" costs include property taxes, insurance, and, if you're buying a townhome or condo, any homeowners' association dues that may result. Many mortgage payments will include what's called PITI (Principal, Interest, Taxes, and Insurance). But that may not be apparent in an initial comparison if only the principal and interest numbers are used. There could also be annual maintenance or upkeep costs associated with owning a home that you would not be responsible for if you were renting. While these costs are not, in and of themselves, a reason not to buy, understanding them is essential in any fair comparison.
- Once the actual costs are known for each decision, take a hard look at your personal finances. How do your other debt obligations fit into the picture? Can you comfortably expect to meet the monthly obligations of owning?
- Take your long-term plans into account. If you are starting a family, or plan to put down some roots, you may find yourself favoring ownership. If you are unsure of how long you will be staying in an area, or are prone to relocation with your job, renting may be more suitable to your situation.
- Consider the economic climate. Where are interest rates when compared to long-term averages? If you are in a lower rate environment (like we are in currently), should you accelerate your desire to own a home one day? If rates are higher than normal, does it make sense to be patient and wait for better timing? Again, how does your decision play into your long-term goals and plans?
- While the tax benefits alone will not likely justify buying versus renting, they do play into the larger picture. What tax benefits do you stand to gain by creating a deductible interest expense? Does that mitigate some of the cost differences that may exist between the two options?
FPA member, Harry K. Foote, CFP®, of Smart College Solutions has this point of view: "I am a fan of homeownership and would recommend that when they find a home they like and can afford the payments, including the down payment, they should buy. Renting is only purchasing a house or building for someone else. You will acquire wealth with long-term ownership, and it's an investment that you live in."
Home prices are much lower than they were a year ago. "In today's housing market, I can understand the concerns of buyers and homeowners that paid too much for their properties, but this is a passing situation that will be resolved," said Foote.
In addition, Foote suggested that first-time home buyers should consider the $8,000 tax credit that is presently available. A tax credit of up to $8,000 is available for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009 "It is just too good to pass up without serious consideration," he said. Learn more about the $8,000 credit for first-time homebuyers at IRS.gov and HUD.gov.
There are several Web sites that offer calculators that you can use to evaluate the rent vs. by decision including Freddie Mac, Ginnie Mae, and AARP.
Financial planners can help you assess whether you should rent or buy a home. Find a financial planner.
