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Deciding what's right for you.
Our Two Cents
Mortgages are considered "good debt" since they are used to purchase a potentially appreciating asset. However, buying can be much more expensive than renting. Factor in all taxes and insurance to decide if you can truly afford a home.
Owning your own home may be part of the American dream, but in some instances it makes more sense to rent. Yes, your monthly rent check is a recurring cost you'll never get back. But owning a home involves a lot more than just paying your mortgage.
What's best for you? Here are some guidelines.
| Consider renting if you… | Consider buying if you… |
|---|---|
| Don’t have the funds for a down payment. | Can put 20% down and pay monthly mortgage payments. |
| Have a temporary housing need. | Intend to live in the area for several years. |
| Expect your housing needs to change substantially in the near future. | Can benefit from the tax advantages of home ownership. |
| Expect to change jobs, requiring you to move in a few years. | Anticipate a stable income. |
| Are not willing or able to deal with general maintenance. | Want to improve the appearance or structure of a house. |
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For an easy way to compare the costs, find the rent ratio by dividing the sale price of a home by its estimated annual rent. A high rent ratio (above 20, typically) means the cost of ownership exceeds the cost of renting. Please note that this rent ratio is just a general guideline and may vary by location.
Example: If a $250,000 home rents for $1,000 a month, the ratio would be $250,000/$12,000, for a rent ratio of 20.8. In this case, it's probably more cost-effective to rent.
If the same home rents for $1,500 a month, the rent ratio goes down to 13.8, and buying becomes more attractive.
Tax advantages of owning a home.
A mortgage is a big liability, but it can also provide some tax advantages to help offset the cost. Here's why:
- A home mortgage is a tax-deductible interest expense. IRS rules say you can deduct the interest expense on up to $1 million ($500,000 for married filing separately) of home-secured debt used to purchase or make capital improvements on your qualified principal and/or second residence.
- If you pay points on your mortgage, these can be deducted in the year you pay them for an original mortgage.
- Property taxes are also income tax-deductible.
Talk to your tax advisor about how a mortgage might benefit your tax situation.