Are you one of the thousands of Chicagoans who voluntarily throw their hard-earned money out the window year after year? Before you sign or re-sign a rental agreement, consider the following and whether you might be better off buying a home instead.
Owning can be less expensive than renting: Think you can’t afford the American Dream? You might be surprised. Here’s a guideline that may change the way you view your seemingly cheap rent. Multiply your monthly rent by 200. This equals the purchase price of a home with approximately the same monthly payments as your rent. For example, if you are paying rent of $750 per month, you would pay approximately the same amount per month to own a home that costs $150,000 (factoring in tax savings).
Rent is subject to inflation: Even more important than the cost today of buying versus renting are the financial impacts down the road. As a renter, your rent is fully exposed to cost-of-living increases, also known as inflation. A reasonable expectation for annual increases in your rent is about four percent per year. So, let’s do the math. In 40 years, with 4 percent inflation per year, that $750 per month you’re paying in rent will balloon to $3,600 per month. That’s like buying a $720,000 house!
While housing costs may increase over the years, once you’ve purchased a home, the bulk of your housing expenses are not exposed to inflation (that is, if you use a fixed-rate mortgage to finance the purchase). Therefore, the comparatively small property taxes, insurance, and maintenance expenses are the only housing costs you will have that will increase over time with inflation.
Equity equals wealth and worth: Over the many years that you are likely to own a home, it should become an important part of your financial net worth—that is, the difference between your assets (financial things of value that you own such as bank accounts, retirement accounts, stocks, bonds, mutual funds, and so on) and your liabilities (debts). Why? Because homes generally increase in value over time. Even if you’re one of those rare people who owns a home that doesn’t see much appreciation, you will benefit from the monthly forced savings that result from paying down the remaining balance due on your mortgage.
All that home equity can help your personal and financial situation in number of ways. If, like most people, you hope to someday retire, but (also like most people) saving doesn’t come easily, your home’s equity can help supplement your other sources of retirement income.
Owning brings tax benefits: One of the treasures of home ownership is that the IRS and most state governments allow you to deduct, within certain limits, mortgage interest and property taxes when you file your annual income tax return. When you file your Federal IRS Form 1040, the mortgage interest and property taxes on your home are itemized deductions.
On mortgage loans now taken out, you may deduct the interest on the first $1 million of debt as well as all of the property taxes. The good folks at the IRS also allow you to deduct the interest costs on a home equity loan (second mortgage) to a maximum of $100,.000 borrowed.
No more landlords: A final (and not inconsequential) benefit of owning your own home is that you don’t have to subject yourself to the whims of a landlord. The fundamental problem with landlords is that many are slow to fix problems. They also can be so focused on maximizing profits that they are stingy when in comes to repairs and improvements.
When you own your own home, you’re in control. You can get your stopped-up toilet fixed or your walls painted whenever and however you like. You also avoid the inevitability of a landlord selling the building and leaving you out in the street.
More information about the advantages of buying versus renting is available at www.bairdwarner.com.
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