Many renters hesitate to purchase a home because they mistakenly believe that the new mortgage payments (including taxes and homeowner’s insurance) will greatly exceed their current rent payments. And, when we compare say an estimated house payment of $1,700 with a typical rent of only $1,300, it initially “appears” that there is a “big difference”, suggesting that it is more economical to rent.
The “after tax” benefits of home ownership, while still important, have been diminished somewhat by the increase in the standard deduction increase to $12,555 and $25,100 (2021) respectively for individual and married tax payers. This increase in the standard deduction has reduced the number of persons itemizing expenses and thus using the interest and homeowner tax advantage when filing taxes.
But there are other important advantages to home ownership. Firstly, taking advantage of the equity increase as your home appreciates in value. The wealth building aspect of home ownership might be the most important benefit today. Over the long-haul home ownership has been the number one method for most middle incomers to develop wealth. If you are an investor type, this increased appreciation can be viewed as a return on one’s home investment.
Secondly, the use of fixed rate financing stabilizes the monthly housing expense and protects owners from continuing being subject to rising rent. As home values have risen so have rents. In many cases there is little difference between the current rent and a monthly mortgage payment. Accumulating the home appreciation rather than paying someone else’s mortgage makes sense.
Finally, the emotional aspect of ownership cannot be overlooked. Owners can improve, paint, landscape and use their home to meet their personal family needs and ambitions without having to obtain approval from a landlord. When children are involved, the freedom accompanying ownership is enhanced even more.
If you are a tax payer that itemizes, the benefit of being able to deduct both the interest portion of your monthly house payment as well as the annual homeowner taxes assessed against the property create even greater projected savings. This tax deduction represents one of the few “tax shelters” still existing for some middle-income consumers.
While each transaction will differ based upon the borrower’s individual financial profile it is not unusual to discover that owning a home is often economically advantageous as well as providing for the emotional well-being of a family.
But, the “buy” scenario improves more when calculating even the most minor amount of “equity return”. This is achieved when with each mortgage payment, the interest portion declines while the principal amount owned by the borrower increases. Remember, the amount of equity return will increase each year, making each continuing year of home ownership a better and better deal for the owner.
In conclusion, there is much to consider when evaluating the “effective” monthly expense of home ownership vs continuing to rent. The financial benefits will vary depending upon each individual’s specific circumstances. Thus, every prospective home buyer is encouraged to become “pre-approved” for a loan during which the above home ownership benefits can be personally calculated and discussed.
With historically low home mortgage interest rates coupled with affordable home values, this may be an excellent time to explore if this is the time for you to quit renting and to buy a home.