Is more cost effective depends on:
Buying a home in order to build equity is one of the main financial reasons prospective buyers jump into the market. At least that was a major factor prior to the financial crisis of 2008, when the U.S. housing market suffered widespread losses. Homeowners and prospective homeowners may now look more closely at the costs and benefits of such a large transaction.
Yet while the sobering effects of the housing crisis may have prompted a more cautious approach by buyers who are more realistic about the level of equity they can build in their homes, the drive to be a homeowner remains strong. It’s mostly about freedom: The ability to paint the walls whatever color you want, or know that a landlord is not going to raise your rent or ask you to leave.
Here are a few points to consider when deciding whether homeownership or renting makes better sense for you.
But there is a downside, too: You may have no control over the fluctuation of your rent, a big-budget item that can change often. Long-term budgeting becomes more difficult.
While a home is a good investment — and let’s face it, you have to live somewhere — many financial experts caution against purchasing a home simply as an investment. Historically, real estate market increases have been slow and steady, not the meteoric spikes seen between 1998 and 2008, when the economy buckled. Some experts like to point out that while housing prices and declines are cyclical, the stock market, on the other hand, had generated average annual returns of between 8 and 10 percent pretty steadily for decades. While those stock market gains may be less secure now, even conservative money planners try to deliver 5 to 7 percent returns, which is better than home value increases in many U.S. housing markets.
This is not an inconsequential question. Whether renting or buying is more cost effective depends on your market, where you choose to live and whether you like to do home improvement and maintenance projects yourself.
Homes cost money: Appliances break, roofs leak, and if you own, you are the lucky soul who gets to pay the bill. If you are renting, landlords pay the plumber and roofer.
That is why many homeowners who have taken out a mortgage in order to buy do so in anticipation of the tax breaks that come with homeownership. Depending on your tax bracket, a first-time purchaser’s 1040 tax deductions can heavily subsidize many of the expenses you have poured into your new home.
Also, since a 30-year fixed mortgage comes with an amortization schedule with the highest interest payments coming in the first years of the loan repayment, mortgage holders have been able to claim deductions in the early stages of ownership.
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