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LESSON 1: BUYING VS. RENTING
"Should we continue renting or go ahead
and buy?"
That's the question hundreds of thousands
of Americans ask themselves every year. It's not an easy one to
answer. Emotions, family and personal reasons all come into play
in any home-buying decision. No one knows what the future holds
for you, your family, your job or your finances. But we can help
you understand what you're going to encounter when you embark on
the sometimes-difficult journey toward the American Dream of owning
a home.
Let's start with some of the economic differences
between renting and owning.
 Many
people believe that owning a home always provides a solid
return on investment. Actually, a home generally doesn't earn
as handsome a return as financial instruments such as mutual
funds. |
If you're looking for the best return on your money,
you're better off investing in the stock market than buying a house.
Primary homes generally don't earn the investment return of financial
instruments such as mutual funds. While the stock market's long-term
average rate of return is in the range of 8 to 10 percent, housing
has appreciated on average in the low- to mid-single digits for
many years. That means you shouldn't buy solely to generate an investment
gain.
The graph below illustrates the stark contrast in
investment return between housing and stocks over the past decade.
In most years, the stock market outpaces housing appreciation.
On the other hand, Uncle Sam helps out by letting
taxpayers deduct part of the mortgage interest and real estate taxes
they pay each year. Borrowers get the benefit only if they pay enough
in one year to exceed the standard deduction.
But that usually happens, especially during the first few years
of a long-term mortgage when most of each payment goes toward interest
rather than principal.
 Say
someone with gross annual income of $40,000 bought a home using
a 7.25 percent, 30-year mortgage of $100,000 on Jan. 1, 2001.
The monthly payment would be $682, excluding taxes and insurance,
and this year, that borrower would pay $6,619 in interest. If
he didn't have the mortgage, he would take a $4,550 standard
tax deduction on his 2001 tax return (assuming he was a single
filer). But by itemizing his mortgage interest, he would have
$2,069 more to subtract from his income. This would provide
a tax break of approximately $579. |
Owners enjoy other benefits, too. They build
equity
over time as home values rise and their mortgage balances shrink.
They also don't have to worry about their housing costs shooting
through the roof because mortgage
lenders can't boost borrower rates and payments, unless those
borrowers have adjustable-rate
mortgages. (More on that in Lesson
4.)
(continued
on next page)
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