Buying Versus Renting

Buying Versus Renting

With pressure on pricing in Fairfield County, Connecticut, the question of buying versus renting needs to be asked. Jeff Jensen, our Mortgage Officer from Connecticut Home Mortgage covers some compelling reasons to own:

Every once in a while it is wise to briefly re-visit the age old question, “Is it better to rent or to buy?”  Having just experienced a significant correction in housing prices, now is a good time to compare.  On the surface there are some apparent benefits for each choice.  I have listed a few below.

Renting Advantages

  • No need for large cash to put down
  • No costs to maintain the property
  • No equity losses
  • You can move at the end of the lease without having to wait to sell
  • Do not have to come up with tax payment during the year

Renting Disadvantages

  • No tax benefits
  • No equity gains
  • No control over annual rent increases
  • Possibility of eviction
  • You may be limited in making changes to décor, paint colors, etc.
  • May have to live with other tenants
  • Reliant upon landlord for repairs and upgrades

Buying Advantages

  • Property could build equity and wealth
  • Mortgage interest is tax deductible
  • Property taxes are tax deductible
  • You are free to decorate as you wish
  • You may choose your own exterior plantings and design
  • You don’t have to get approval to make repairs or upgrades
  • Your monthly payment is fixed with a fixed rate loan and will not go up every year

Buying Disadvantages

  • You have to pay the property taxes when due
  • You have to pay for any maintenance and repairs
  • Your insurance will be higher
  • In order to move you will have to go through the process of selling the house or carrying two places to live
  • You are fully at risk for the value of the house.  You could lose equity.

For analysis of renting, one should consider that prior to arriving at the asking price for the monthly rent, a landlord will consider the ongoing costs of the property.  Initially he/she will make sure that the rental income covers the “monthly nut” which typically includes the mortgage payment, monthly property tax and monthly insurance.  Then most landlords add an allowance for maintenance based on their experience with rental units over the years.  The result is that, although the tenant is not paying for the property tax or the homeowners insurance or maintenance and repairs per se, those items are essentially being included in the monthly rent.

Historically property values have risen in this country at a rate far greater than inflation.  Each property is unique and has its own value attributes and shortfalls.  Property values trend differently on particular streets, sections of town, towns and cities and sections of the country.  Despite the recent “bubble”  in housing prices, most homeowners who purchased their homes in 2003 and earlier have built equity in their homes.  For homeowners with modest incomes and without the benefit of substantial savings or investment accounts, home ownership may be their greatest opportunity to build wealth for their families and/or their retirement.  Downsizing is a popular trend which allows homeowners to realize gains in property value providing funds for retirement while reducing their monthly costs.

Now that homes appear to have stopped  losing value in many areas of the country, a great opportunity has been created.  With homes at their lowest values in year and interest rates at their lowest levels ever, the argument for homeownership is compelling.  There are programs available which allow buyers to purchase homes with as little as 3.5% down and even with “0” down for special category loans.  Those who have 20% of more to put down can purchase without the need to pay monthly mortgage insurance.  Look at the comparison below to compare owning and renting a $300,000., 1,400 square foot house.

 

Buy Rent
Monthly Payment $1,146.00 $1,950.00
Monthly Property Tax $450.00 $0
Monthly Insurance $80.00 $40.00
Down payment $60,000 $0
Interest $0 (50)
Net Total Payment $1,676.00 $1,940.00
Amount Deductible $14,923 $0
Net Tax Savings $3,730 $0
Monthly Savings $310.83 $0
Net After Savings $1,465.17 $1,940.00
Extra Monthly Cost $0 $574.83 x 12=$6,897 per year

 

The example above assumes a buyer in the 25% tax bracket.  Thebuy figures do not any allowance for maintenance but an annual savings of over $6,000. should more than cover any maintenance costs encountered.  With home prices as low as they are currently, the argument for buying over renting has never been stronger.

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