Should you rent or own? It’s an important question, and financial experts would agree that you should take the time to consider the pros and cons, based on your unique situation.
The rewards of home ownership can be significant. Purchasing real estate has been a solid investment for many years. Becoming a homeowner is also an achievement that can offer a sense of pride, financial stability and potential tax advantages.
Of course, there are certain responsibilities associated with owning a home. If a repair is needed or you want to make improvements, there’s no landlord to call– it’s up to you. And landlords will often mention this benefit of renting — for obvious reasons. If you are renting, you’re helping your landlords make their mortgage payment.
Consider this: If you are paying $1,000 per month for an apartment, and you know your rent will increase 5% every year, then over the next five years you will pay your landlord $66,309. And if you are renting a house, and not just an apartment, you’re probably paying much more than $1,000 per month for rent. Either way, you don’t gain any equity (the portion of your home’s value that you own free and clear) by shelling out this monthly housing expense.And you certainly won’t benefit when the property value goes up! (If anything, it will be another excuse to raise the rent.)
On the other hand, if you were to purchase your own home, during that same 5-year period, you will start building equity with every monthly payment.A portion of every monthly payment goes to paying off the principal – the amount you owe on the home. In addition, as your home grows in value, you get the benefit of 100% of that increase in value, even though the bank still “owns” a big chunk of the house.
To give you an example of how this works, let’s say you buy a $400,000 home. As of this writing, home values in Washington are growing at an annual rate of about 9%. But let’s assume a much more conservative 2% annual rate of growth. In 5 years, under those circumstances, your $400,000 home would be worth almost $433,000 (compound appreciation) – and if you sold your home at that point, the bank would get its loan paid off, but that extra $33,000 would be yours.
If you buy a home and choose a fixed-rate loan program, you can have the comfort of knowing that your monthly mortgage payment will never go up(other than some property tax increase, or home insurance fluctuation). In fact, you would have the option of refinancing to a lower interest rate at some point in the future should interest rates drop, and this would cause your monthly mortgage payment to go down.
In addition to building equity, you also get tax advantages with home ownership. Depending on your tax bracket, owning a home is often less expensive than renting, after counting the value of your mortgage interest tax deduction. Interest payments on a mortgage below $750,000 are tax-deductible, and we will help you evaluate the tax advantages of various loan scenarios and share this information with your tax consultant so you will know how much that deduction is worth in your case.
To find the loan program that is right for you, we will need to evaluate your monthly household income, current assets and savings, as well as any monthly obligations you may have for credit card payments, car payments, child support, etc. These pre-qualification factors, along with the report of your credit score, will determine how much house you can afford and what interest rate you will pay for financing. It is also important to let us know what your future goals are, because this will help narrow down which loan option is the best fit for your long-term needs.
Housing is an expense that takes a big bite out of your monthly budget. If you are a renter and feel that “home” is more than just someplace to hang your hat, think about the advantages of purchasing real estate. It may be time to take the first step toward building your personal net worth as a home owner.