The Decision to Rent or Buy -- Because Money Matters

The decision to

Rent or Buy

Because Money Matters

quity ... life isn't always fair!

Regardless of whether we buy or rent, housing is where the biggest portion of our income goes. The decision to rent or buy is a personal one based on many factors. This article focuses on some of the positive financial consequences of homeownership. Property owners often benefit from equity, appreciation, taxation, and many times higher credit scores.

ppreciation .... it's not about being grateful

Owning a home is a significant financial investment. As with any investment, you expect it to grow. Otherwise, you would find a different way to put away your hard earned money to work. Investments do involve risk. Over time, though, home owners have generally seen the values of their homes grow or appreciate in value. The government tracks and publishes home appreciation rates by major metropolitan area through the Office of Federal Housing Enterprise Oversight (OFHEO). The latest published report from OFHEO shows continued appreciation rates in home values although the rate of appreciation has declined over the last few quarters. What does all of this mean? Renters are at a disadvantage. The equity a homeowner builds isn't limited to what they pay towards the original value of the home. Instead, they build additional equity as the home appreciates, or grows in value, over time.

So, while renters receive no compensation for their housing payments, Buyers can reap rewards. Of course, not all homes appreciate at the same rate and in some rare situations some may even depreciate. That's a good reason to seek out experts as you consider this important decision. One good tool a realtor can provide is a Comparative Market Analysis which shows recent and historical home sales for a specific property. For information in the central Florida area, click here to request your analysis.

axation ... Uncle Sam wants you to own a home

You've heard Ben Franklin's famous quote before - In this world nothing is certain but death and taxes. While buying a home doesn't eliminate taxes, in many cases, it can help decrease them. To encourage homeownership the government gives "tax breaks". It goes something like this. Remember the example of the Buyer above who purchased a $100,000 house and made regular monthly payments under a 7%, 30 year mortgage for 5 years? Their monthly mortgage payment has two components - principal and interest. We've seen how the principal is important in growing equity. Now let's focus on the interest portion. Over the first five years, the homeowner can roughly expect the following yearly interest expenses:

Mortgage interest in tax deductible. The government allows homeowners to include mortgage interest paid in their itemized deductions. In this case, the Buyer would benefit since the interest paid alone is more than the individual "standard" deduction allowed by the IRS of $5,500 in 2006. Renters don't benefit from this law. Of course each individual is different. Some of us pay at higher or lower tax rates.... believe it or not some of us don't pay taxes at all. The best way to determine how homeownership can benefit you is to talk to an expert - a CPA.

igher credit scores .....money, money, everywhere!

As if equity, appreciation, and the tax breaks aren't enough, Homeownership has other advantages. One important way is credit scores. Credit scores can be positively influenced by a real estate loan that has always been paid timely. Homeowners establish a strong credit base through their mortgage payments driving up their total credit score. Here, again, Renters can be at a disadvantage. What does this mean? Homeowners can receive more credit at lower costs than if they did not own a home. You've probably noticed on many credit and insurance applications a question about homeownership. Lenders and financial service organizations believe homeownerhip is a strong predictor of financial stability and use it accordingly.

Buying a home is a very personal decision and not for each of us. The benefits of equity, appreciation, taxation, and higher credit scores are important considerations but others factors can affect your decision. The best approach is to gather information from local real estate and financial experts as you look to invest in your future. For additional information in the Central Florida area, click here to contact John Carter.

John Carter is a Coldwell Banker Realtor in Polk County Florida specializing in residential sales.

5 year House Price Appreciation Rate

55.21%

*As reported by OFHEO

4Q06 report

or call (863) 529-7488

For a professional Comparative Market Analysis (CMA) on any Polk County property call

(863)

529-7488

What is the formal definition of equity?

Click here

So why buy? An important consideration is equity. It's simple really. Home Buyers build ownership in a property while Renters don't. Any payments made when we rent are simply in exchange for the right to inhabit or otherwise use the property. Homeowners, instead, purchase a home as an investment. It's an asset. Even when we "share" ownership with our mortgage holders, when we decide to sell the home we expect to receive a payment for the equity we have built up over the life of our ownership. But it doesn't end there ....

Visit the

Office of Federal Housing Enterprise Oversight

to see official appreciation rates for your area.

To understand the power of appreciation, let's assume a Buyer purchased a home worth $100,000 five years ago with a $5,000 downpayment and a 30 year mortgage at a rate of 7%. The day of their purchase their equity is $5,000. Their equity grows from that point for two different reasons. The first is the regular mortgage payment - part of which builds equity and part of which pays the interest or finance charge associated with their mortgage. At the end of 5 years, the homeowner has paid approximately $5,575 in principal.

The second reason equity grows is appreciation. Using the OFHEO 5 year appreciation rate of 55.21%, the value of the home is now $155,521. It's worth $55,521 more than when they originally purchased it. Their total equity is

Equity Calculation

$5,000 (original downpayment)

+ $5,574 (principal payments)

+ $55,521 (market appreciation)

= $66,095

Year1