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Feature Articles: Housing

 

house keyRenting or buying your home

Brenda Procter, M.S., state specialist and instructor, Personal Financial Planning, University of Missouri Extension

 

Deciding whether to rent or buy a home is the most important financial choice many of us ever make. Buying a home is a big deal and house payments take a big chunk of the family budget.

 

In the 1970s, house payments took about one-fourth of a family’s take-home pay. Today they take a much bigger piece — about one-third or sometimes even more.

 

Owning a home has some advantages over renting:

 

  • Mortgage payments are like forced savings — they make your house an investment, not just a place to live.
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  • You may have a better quality of life if you buy instead of rent.
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  • You can do anything you want to improve or change the house to suit your needs.
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  • You may have more privacy if you own your home.
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  • You’ll have no landlord to let in and may not have neighbors who make noise or bother you.
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  • Upfront (closing) costs and the mortgage interest you pay are tax-deductible.

 

In spite of the advantages of owning a home, renting can often be a better option. Young people can’t always afford the down payment and closing costs or they don’t make enough money to qualify for a loan. There may be other reasons to rent instead of buy a home.

 

These are some potential disadvantages of buying a home:

 

  • If you know you’ll be moving within a few years, renting probably makes more sense than buying a home. Why? You must pay lots of up-front costs, also known as closing fees, when you buy a house. Closing fees cover things like a credit report, an appraisal of the property, property inspections, recording fees, loan fees, mortgage insurance, title insurance, homeowners insurance, legal fees, prorated taxes and termite inspections. They can be 1 to 4 percent of a home’s price.
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  • When you sell the home, you’ll pay more closing costs and a realtor’s commission (6 percent or more). If you’ll be staying in the home for many years, these costs won’t matter much if the house goes up in value. If you don’t know how long you’ll stay or if it will only be a few years, consider renting instead.
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  • If you can rent a place you like that is below market value, you could rent and invest the savings somewhere else. Why? You might be able to make a higher return if you put your money in another investment, like an employer-sponsored 401(k) plan (employers sometimes match your contribution) or you could save that money to buy a better house later.
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  • You might not get a tax break if you buy a home. Why? Even if you can deduct all the interest, you may pay less in taxes if you don’t itemize. When homeowners do not itemize, they can take a standard deduction, which is a fixed amount allowed for each taxpayer. For 2008 taxes, the standard deduction is between $5,450 and $10,900, depending on your marital and filing status. The amount of taxes you save from deducting mortgage interest has to be more than the standard deduction for you to save on your tax bill from home ownership.
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  • If you have just moved to a new area, you may want to rent until you have time to get to know the community. Why? If you rent for awhile, you have time to compare different neighborhoods, watch traffic flow, and ask around to find good realtors and lenders.

 

The decision to buy a home is a huge commitment and taking your time may help you avoid costly mistakes. Weigh the advantages against the disadvantages, think about the trade-offs and make your own decision.

 

 

Sources:
Internal Revenue Service. Exemptions, Standard Deduction, and Filing Information, 2008. http://www.irs.gov/pub/irs-pdf/p501.pdf.

Israelsen, C. 2003. Personal and Family Finance class lectures at the University of Missouri, Columbia.

Israelsen, C. and Weagley, R. 2002. Personal and family finance workbook. 3rd ed. Dubuque, Iowa: Kendall/Hunt Publishing Co.

Kobliner, B. 2000. Get a financial life: Personal finance in your twenties and thirties. 2nd ed. New York: Fireside.

 


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Last update: Wednesday, March 10, 2010