Buying a home in order to build equity is one of the main financial reasons prospective buyers jump into the market, but many people also yearn for the satisfaction of home ownership.
Painting your rental apartment walls mango or some other trendy color may put your security deposit in jeopardy. But taking that same sense of color style and applying it to a tired room in an old house you just purchased is called "sweat equity." That has a nice ring to it.
There is definitely an upside to renting:
- Flexibility. Check out neighborhoods if you are new to town or are researching where you want to buy. By renting you can test an area without committing to it.
- Uncertainty in your career. If you think you might need to move in the near future, or are mulling job changes that span several areas of town or are located elsewhere in the country, you might want to rent, since buying ties you down to a greater extent.
- Uncertainty in income. If you expect a pay hike or pay cut in the near future, that can change your borrowing ability as well as impact your ability to pay a mortgage.
- Got bad credit? Creating a history of on-time rental payments can help you build the sort of credit you need to qualify for a mortgage.
- No maintenance. When the pipe leaks under the sink, you don't head to Home Depot, you head for the telephone and call the landlord.
- Incidental expenses. The landlord pays for many utilities such as water, sewer, garbage, and in some cases heat and hot water as well.
There are upsides to buying a home:
- Equity. When you pay rent, you don't own anything. When you pay a mortgage, you increase your degree of ownership in your home with every payment. Also, you can borrow against your ownership (or equity) in the home to pay for major purchases, refinance your home at favorable rates, or, once you've paid the entire mortgage off, borrow to fund major purchases like a second home or your child's education.
- Tax deductions. You can deduct mortgage interest as well as your property taxes. Uncle Sam doesn't give renters this bonus. Not only that, but if you meet certain requirements the IRS won't apply a "capital gains" tax on your profits from the sale of your home. You can keep the first $250,000 in profit you make when selling the home if you're single, or the first $500,000 if married. In addition, those who work from home may be eligible to take deductions for their home office and portions of utilities.
- Creative control. So, you like dozens of pictures on the wall? Well, hammer away -- they are your walls now. Go ahead and paint them mango! Wish you had another room? Go ahead and add one.
- Maintenance choices. If you live in a house, you can decide how to approach maintenance, either doing it yourself or picking your own contractor. If you live in a condominium or homeowners' association, you may pay a monthly fee to have maintenance work covered by the association's contractors.
While a home is a good investment -- and let's face it, you have to livesomewhere -- many financial experts caution against purchasing a home simply as an investment. Historically, the real estate market increases have been slow and steady, not meteoric (until recently). The stock market, on the other hand, has generated returns of between 8 and 10 percent pretty steadily for decades.
That depends on your market and where you choose to live. And consider whether or not you like to do maintenance. Homes cost money. Appliances break, roofs leak, and you are the lucky soul who gets to pay the bill. If you are renting, landlords pay the plumber and water/sewer and garbage bill to go along with it.
But, of course, there is that tax break. Depending on your tax bracket, a first-time purchaser's 1040 tax deductions heavily subsidize housing expenses in the first few years. Since a 30-year fixed mortgage requires high interest payments -- all deductible -- at the beginning of the loan, you deduct a larger share of the mortgage cost early in the life of the loan.