Ask an average American whether it's better to own or rent your home, and you'll likely hear that owning is better. You get to build equity in an asset that's likely to appreciate in value over the long haul, and you can enjoy mortgage interest tax deductions as well. Some savvy sorts will point out, though, that renting sometimes is better -- such as when you're not going to stay in the same place too long, or if you're saving (and investing) money by renting and are earning good returns.
David Bach, author of The Automatic Millionaire Homeowner, recently weighed in with some more advantages of owning.
For starters, he explains that it's cheaper to buy: "Assume you're renting a house for $1,500 a month. Now let's say you stay put for 30 years, during which the landlord increases the rent by 5% a year. Over those 30 years, you will hand over a total of nearly $1.2 million in rent payments -- and at the end, you'll have nothing to show for it except a bunch of cancelled checks. To add insult to injury, you'll now be paying $6,174 a month in rent!" That certainly does sound inferior to what could be a fixed mortgage payment for 30 years, with an appreciated, owned home as the end result. (If a $200,000 home appreciates at 5% per year, on average, it will end up worth about $865,000.)
Bach goes on to explain that mortgage interest deductions "can effectively reduce your monthly mortgage payment by 30% or more." I'll interject here that this benefit decreases over time. While much of your mortgage payment in your first years goes to interest, that percentage decreases as the mortgage ages. And actually, unless your payments are going completely to interest, a portion of them will pay down principal and not apply to this 30% savings. So ... if you're in the 28% bracket, you can save 28% only on the portion of your payment that's for interest -- which could make it anywhere from 0 to 28%.
Then there's the tax-free gain. While most of your stock market gains will likely be subjected to taxes, you can, as long as you follow the rules, walk away from the sale of your home with a gain of up to $250,000 -- tax-free! If you're married, make that $500,000! Our tax expert, Roy Lewis, has offered more details on this great benefit. Before I wrap this up, I'll mention another advantage of homeowning -- access to home equity loans.
- Sometimes, home values do go down over time. A home is not always a winning investment.
- It can be good to think of your home not as an investment, but as shelter. Cost-effective shelter, perhaps.
- While that 30% savings may not always ring true, it's bolstered by deductible property taxes.
- Renting can save you from spending gobs of money on home repairs, home improvements, and even impulse spending.
If you're interested in homebuying and homeowning issues, visit our Home Center, which features lots of money-saving tips and even some special mortgage rates.
And if you're in the market for a mortgage, another way to inform yourself about options is to spend some time at the websites of lenders. Here are some major lenders:
National City is a Motley Fool Income Investor pick.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.