Owning Vs Renting – Part 2

Advantages of Buying Your Home

Control over housing expenses

By selecting a fixed-rate 13, 20, 25 or 30 years mortgage, the homeowner has assurance that housing costs won’t increase over the period, and, in fact, will be eliminated at the end of the term (subject to refinancing).

You build equity

Some of each monthly mortgage payment goes towards the loan’s interest. Other portions may go to homeowner’s insurance and taxes. The reminder pays down the loan principal. Every dollar put towards your loan’s principal represents a dollar of equity – actual ownership of the property. Further, the property should appreciate in value each year, further adding to equity (What the house could be sold versus what is owed on it). With certain blip periods such as the 2006 housing bubble burst, home prices in the U.S. appreciate nationally at an average annual rate between 3% and 5% (home values appreciation in different metro areas can appreciate at markedly different rates than the national average).

Improvements increase your home’s value

A homeowner can also increase a home’s value through home improvements, thus both making your home more comfortable and enjoyable while growing its loan-to-value (LTV) ratio. For instance, adding a bathroom or finishing a basement substantially increases the property’s functionality and appeal, while potentially boosting its value.

Tax advantage of home ownership

There are significant tax benefits associated with buying a house, both at the time of purchase and for the duration of time you own your home.

Home exemptions. Many states exempt owner-occupied homes (homesteads) from a portion of the property tax that would normally accrue. For instance, Louisiana exempts the first $75,000 of a home’s value from property tax assessments, so a $200,000 home in New Orleans is taxed as if it were worth $125,000.
Federal tax deductions. When you’re looking to purchase a home, it’s important to understand what can be deducted on your tax return and what can’t. Property taxes and interest paid on your mortgage can be deducted if you itemize your income taxes, which can reduce your income tax burden. Many home buyers, unfortunately, overlook the effect of the mortgage on their federal income tax payments. Mortgage interest can be a powerful financial planning tool. Calculate the amount of mortgage interest deductions you are eligible for and include that in your annual financial planning. Then, make a point of checking Internal Revenue Services (IRS) Form 1098 which you’ll receive from your lender at the end of the year. This form shows the amount of mortgage interest that you’ve paid. The Tax Cuts and Jobs Act (TCJA) applies from 2018 to 2025 and limits the aggregate deduction for state and local real estate taxes; state and local personal property taxes; state and local, and foreign, income, war profits, ands excess profits taxes; and general sales taxes (if elected) for any tax year to $10,000 ($5,000 for married filing separately). This limit does not apply if those taxes are paid or accrued in carrying on a trade or business or in an activity engaged in for the production of income. IN other words, if you are just living in your home, you can only claim $10,000 in tax deduction on your property, but if you are earning income directly from your home in some way, the limit might be waived.
Ownership rights and creative freedom. Your decorating and home improvement choices are just that – yours, provided they don’t break building codes or violate homeowner’s association rules. You can paint walls any which way, add fixtures, update or finish your basement, or build a patio or deck. Changing your environment to suit whims is a freeing aspect of homeownership.
A sense of belonging to the community. Homeowners tend to stay in homes for longer than renters and are more likely to grow roots. They might join a neighborhood association, sponsor block parties or National Nights Out, volunteer at a nearby community center, join a school group, or align with a business improvement district. Renters may not do any of those things, particularly if they know their lease is up in a year and they might move. There’s an intangible pleasant feeling attached to owning your own house, a sense of freedom and independence. The home you live in belongs to you and you only (or your spouse or partner), and you can do what you want with it. You aren’t daunted about increases in rent or risk of losing the lease. You’re free to make improvements and changes. Also owning your home gives your children the guarantee of attending the schools in the area on a more permanent basis; you never need to worry about a notice from the landlord to vacate your rented house or apartment for a variety of reasons over which you have no control.

Disadvantages of Owning

Maintenance

The renter’s largest advantage might just be the houseowner’s major disadvantage. While insurance might be available to protect agains expenses from major catastrophe, usual maintenance items are on the homeowner’s dime. Maintenance and repair can be as simple as repainting the baseboards and can be also extensive and expensive as replacing a HVAC system or sewer pipe. The expense will vary from year-to-year; however, you can expect to pay about 1% of the value of your home annually toward these expenses. If you live in a $200,000 home for 10 years, that’s $20,000 over the period, and perhaps more if you must replace a costly, long-lived mechanical item, such as a furnace. Keep in mind the usual homeowner’s chores of lawn care, snow removal, gutter cleaning, and other regular home maintenance needs.

Upfront and closing costs

Buying a home entails numerous upfront costs. Some are paid out-of-pocket after the seller accepts your purchase offer, while others are paid at closing. These include earnest money, down payment (typically ranges from 3.5% chiefly for FHA (Federal Housing Administration) loans to more than 20% of the purchase price), home appraisal, home inspection, property taxes, and first year’s homeowner’s insurance.

Loan of relocation flexibility

It’s much easier to break a lease and move out of town than to arrange for the sale of a residence. Selling the home from out-of-town involves its special logistics and financial problems, such a dealing with the mortgage while the home is on the market.

Financial loss potential

Homeownership builds equity over time; however, equity doesn’t equate to profit. If home values in your area go down or remain stagnant during your time as a homeowner, the appraised value of your home could decrease, putting you at risk of a financial loss when you sell.

Excerpted from my book “The Home Buyer’s Guide”.

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