07/07/2014 - Home Ownership vs. Renting

The American Dream since WWII has been home ownership, with visions of backyards and white picket fences. As you look around today, though, you will see more and more families renting, still seeing foreclosures in ample supply since the recession. Is it really a good idea to buy?

In the 1930's a typical down payment for a home purchase was 40 percent, with the balance in a five to 15 year loan secured by a mortgage. In those days having a mortgage came with a stigma. The prevailing wisdom of the day was to stay out of debt and "pay as you go." No one wanted to be a debtor.

My, my, how things have changed.

A frequently touted benefit of home ownership is the ability to deduct mortgage interest on your income taxes. This benefit primarily applies to persons in the higher tax brackets. Although the mortgage interest deduction is cited by many homeowners as an important reason to own a home, more than half of homeowners do not take the deduction. Renters already get the standard deduction. Owners only get a deduction for mortgage interest if their itemized deductions exceed the standard deduction. So, there is no tax benefit at all for the interest you pay under the standard deduction amount. If you have to spend $1.00 in mortgage interest to save 20 cents on taxes, you're not getting ahead. An MIT study determined that for middle-class households (defined as households with $40,000 to $75,000 in annual income), the mortgage interest deduction saved each family $542 per year. Not a princely sum.

Moreover, beware of mortgage lending calculators that show you can buy a home for a relatively small monthly payment, say $800 per month. Most of these calculators do not take into account all of the costs of owning a home. Usually the mortgage payment is calculated on the assumption that you can put down a 20 percent down payment and does not include real estate taxes, private mortgage insurance, homeowner's insurance, and others costs (not to mention maintenance and repairs) which can greatly increase the monthly cost of home ownership. Actual costs could be double the amount shown on the so-called mortgage calculator.

The New York Times provides an excellent calculator comparing the costs of renting vs. owning on its website: http://www.nytimes.com/interactive/business/buy-rent-calculator.html. You can enter values for the variables in your own personal financial situation. One of the big factors is how long you will stay in your home. In general, the longer you stay in a home, the better it is to buy. But in today's economy and job market, being able to relocate is important. What if you can't take your dream job because you would take a financial bath selling your house? From a purely financial perspective, mortgage interest rates are also a key factor and can make the difference between whether it is better to buy or rent.

Keep in mind, however, that home ownership can act as a forced savings plan. Since you have to make the mortgage payment, you are forced to begin setting the money aside, even if it all initially goes to paying interest. Will renters who save money put the saved money in another investment? Or will they spend it on consumer goods?

There is nothing wrong with home ownership. However, the assumption that it is better than renting for everyone is not correct. There are non-financial considerations as well. Many sociologists point out that home ownership helps provide family stability and security. By all means, buy a home if that is right for you. But don't delude yourself about the financial advantages.

- Patti Spencer