Should I Buy or Rent?
Renting vs. Buying Your Own Home
With historically low mortgage rates and an array of low- or no-down payment
loans available today, few obstacles remain to buying
By Steve Felt, (856) 359-6366
To rent or to buy? When the average American reaches a certain age or stage in life,
that question begins to resonate with urgency. Since it is a financial question, the first
logical step to finding the answer is to consider the merits of both and run a simple “cost-
benefit analysis.” Renting provides flexibility and mobility, with few upkeep worries and
the chance to invest your money in other areas. However, you’re building no equity for
your housing dollar and rent increases may even out pace inflation. In economic terms,
the “opportunity cost” of renting is not spending your rent money to buy a home or reap
the benefits of owning. And there are many such benefits. In addition to the intangible –
the emotional satisfaction of owning your own home – are the myriad financial benefits:
a significant tax break through the deduction of mortgage interest, property taxes and
points paid on the loan; the building of equity in what is likely to be the largest single
investment of your life; and the potential for a large tax-free capital gain on the sale of
your home in the future.
To be fair, home ownership is not all wine and roses. First and foremost, you will need
to have decent credit in order to qualify for the most competitive programs available in
the marketplace. You must pay the mortgage (which is likely to be 1.5 times more than
your current rent) as well as property taxes, upkeep costs, insurance, and other
expenses; you become less mobile; and the value of your home could decrease.
On balance, though, the answer to the rent vs. buy question is about as close to a “no
brainer” as financial questions can get. Quite simply, you should buy if you can and
expect to be in one place for at least the next couple of years. The benefits of buying far
exceed the costs – and greatly outweigh the benefits of renting. Plus, today’s interest-
rate environment and vast array of low- or no-down payment mortgage options make it
easier than ever for first-time home buyers to live the American Dream.
A Closer Look at the Tax Breaks
It’s important to fully understand the tax-related benefits of buying a home. In short,
for most of us it’s the best tax break there is. We’ll use an illustration below to show that
a $1,000 per month mortgage is the equivalent of paying $750 a month in rent.
Here’s how it works: mortgage interest, including points, and real estate taxes are tax
deductible. Plus, you have the potential to realize a significant tax-free capital gain on the
sale of your home in the future.
• Points are the fees paid on a mortgage loan; one point is equal to 1 percent of the loan
amount. So if you got a $100,000 mortgage with one point, that’s a $1,000 tax
deduction. For most home purchases (not including refinances, which are handled
differently) points are totally deductible in the year they are paid. Check with an
attorney or tax accountant to discuss your specific circumstances.
• Mortgage loans typically are structured so that most of what you pay in the first few
years is interest. And that interest is tax-deductible. As an example, let’s say that 90
percent of your $1,000 monthly mortgage payment is interest. That’s a deduction of
$900 a month. In other words, your taxable income is reduced by $10,800 a year. If
you’re in the 25 percent tax bracket, your deduction is worth about $250 a month.
(Thus, your $1,000 monthly mortgage equates to a $750 monthly rent on an after-tax
basis.)
• To reap the monetary reward of your mortgage tax deduction, you can either wait
patiently for a nice income tax return every year, or you can adjust your withholdings
from your monthly pay. Simply claim additional allowances on your W-4 form to see
your paycheck increase immediately. You can use the worksheet on the back of the W-4
to figure out how many allowances you should claim.
Your real estate taxes will, of course, depend on where you live. However they, too, are
tax deductible. And the Taxpayer Relief Act of 1997 allows married couples filing jointly to
earn up to $500,000 in gains on the sale of their primary residence, tax-free. Single
homeowners can earn up to $250,000 in tax-free gains. Again, check with a tax
professional on the specific guidelines and restrictions of this law.
Interest Rates Almost Better Than Ever
First-time home buyers can also take considerable comfort in the fact that mortgage
rates remain at historically low levels. Indeed, according to Freddie Mac, the weekly
national average rate for the standard 30-year-fixed mortgage in 2006 has stayed
between 5.85 and 7.18 percent. And adjustable rates are available at even lower rates
with payments fixed for the first one to five years. These rates rank among the best in
more than 30 years. From a cost perspective, there’s no better time to get a mortgage
than now. If you need confirmation, ask your parents what their mortgage rate was when
they bought their house 20 or 25 years ago. Believe it or not, it may well have been up to
10 percentage points higher than the rate you can get today.
Down Payments No Longer a Big Issue
Until the mid-1990s, coming up with the required 20 percent down payment to buy
a house was the biggest single obstacle to home ownership. That obstacle has since
been
shattered. First, lenders began offering mortgages for up to 95 percent of a home’s
value,
leaving only a 5 percent down payment. Then came the 97 percent loan-to-value (LTV)
mortgage. Now, qualified borrowers can get a mortgage for 100 percent of the value of
their home – or even more, if they want to finance the closing costs as well.
These low- or no-down payment loans have thrown the door wide open for first-time
home buyers who could never seem to save enough for that pesky down payment. Still,
there are a couple of important points to consider when deciding whether to take
advantage of one of these high LTV loans or trying instead to save a little more for that
initial down payment.
First, these low- and no-down payment mortgages come with a somewhat higher
interest rate than the loans available to those who can put down between 10 and 20
percent. But, again, mortgage interest is fully tax-deductible, so that shouldn’t be a big
concern. More important, perhaps, is that anyone who puts down less than 20 percent
usually must pay private mortgage insurance (PMI), which is required by lenders to
protect them in the event of a default on the loan. PMI typically adds a 0.5 to 0.75 percent
premium to your interest rate. Using our $100,000 hypothetical mortgage again, that
would tack on an extra $42 to $63 per month in PMI costs. Only after you have built 20
percent equity in your home can you cancel PMI, so it’s likely to be with you for a while
when you put little or nothing down to buy your home.
But there are ways to get around PMI even if you put down less than 20 percent.
Programs that combine an 80 percent first mortgage and a 10, 15 or 20 percent second
mortgage have been growing in popularity over the last few years due to the fact that the
buyer is not required to pay PMI. Many borrowers will qualify for these combination loans,
however, there are specific guidelines and credit qualifications necessary for this type of
financing.
Nevertheless, most would agree, though, that PMI is a fairly small price to pay
considering the substantial tax breaks and other benefits that home ownership affords.
Those tax breaks, combined with the historically low interest rates available today – and
the array of low-and no-down payment mortgages – comprise a resounding answer to
the question we posed at the beginning: To rent or to buy?
By all means, buy and buy smart. Before you decide to plunge into home ownership, it is
wise to find a reputable lender prior to contacting a real estate agent. Your Mortgage
Specialist will be sure that you are Pre-Approved by a Lender and not just pre-qualified
for a mortgage loan. Pre-Approval gives you a stronger negotiating point when dealing
with a Seller, and any reputable Realtor will require you to be pre-approved prior to
working with you on your search. If you decide to select your real estate agent before you
find a mortgage consultant, be sure to ask him or her for the name of a good mortgage
consultant who is familiar with the Federal Housing Administration (FHA) and HUD to
ensure that you have access to all loan options. There are many Lenders and Mortgage
Brokers that are not licensed to do FHA loans so be careful with whom you choose to
give your private information. Identity theft is at an all time high in this country and it is
best to work with a company that you can visit to ensure that your private information is
safe from predators. HUD approved Lenders must pass extra financial audits and
licensing requirements to ensure consumer protection.
Steve Felt has been in the Mortgage industry since 1998 and has worked in retail and
wholesale origination. Steve is a Certified Mortgage Planning Specialist, a distinction that
less than 1% of all Loan Officers have attained. Steve frequently instructs CFP’s and CPA’
s on Mortgage Planning techniques and is a member of the Tri-State Financial Planning
Association and the CMPS Institute. Steve can be reached at (856) 359-6366, by email
at steve@feltfinancial.com Be sure to check his website www.FeltFinancial.com for a
calendar of First Time Home Buyer seminars and more information on mortgages.
With historically low mortgage rates and an array of low- or no-down payment
loans available today, few obstacles remain to buying
By Steve Felt, (856) 359-6366
To rent or to buy? When the average American reaches a certain age or stage in life,
that question begins to resonate with urgency. Since it is a financial question, the first
logical step to finding the answer is to consider the merits of both and run a simple “cost-
benefit analysis.” Renting provides flexibility and mobility, with few upkeep worries and
the chance to invest your money in other areas. However, you’re building no equity for
your housing dollar and rent increases may even out pace inflation. In economic terms,
the “opportunity cost” of renting is not spending your rent money to buy a home or reap
the benefits of owning. And there are many such benefits. In addition to the intangible –
the emotional satisfaction of owning your own home – are the myriad financial benefits:
a significant tax break through the deduction of mortgage interest, property taxes and
points paid on the loan; the building of equity in what is likely to be the largest single
investment of your life; and the potential for a large tax-free capital gain on the sale of
your home in the future.
To be fair, home ownership is not all wine and roses. First and foremost, you will need
to have decent credit in order to qualify for the most competitive programs available in
the marketplace. You must pay the mortgage (which is likely to be 1.5 times more than
your current rent) as well as property taxes, upkeep costs, insurance, and other
expenses; you become less mobile; and the value of your home could decrease.
On balance, though, the answer to the rent vs. buy question is about as close to a “no
brainer” as financial questions can get. Quite simply, you should buy if you can and
expect to be in one place for at least the next couple of years. The benefits of buying far
exceed the costs – and greatly outweigh the benefits of renting. Plus, today’s interest-
rate environment and vast array of low- or no-down payment mortgage options make it
easier than ever for first-time home buyers to live the American Dream.
A Closer Look at the Tax Breaks
It’s important to fully understand the tax-related benefits of buying a home. In short,
for most of us it’s the best tax break there is. We’ll use an illustration below to show that
a $1,000 per month mortgage is the equivalent of paying $750 a month in rent.
Here’s how it works: mortgage interest, including points, and real estate taxes are tax
deductible. Plus, you have the potential to realize a significant tax-free capital gain on the
sale of your home in the future.
• Points are the fees paid on a mortgage loan; one point is equal to 1 percent of the loan
amount. So if you got a $100,000 mortgage with one point, that’s a $1,000 tax
deduction. For most home purchases (not including refinances, which are handled
differently) points are totally deductible in the year they are paid. Check with an
attorney or tax accountant to discuss your specific circumstances.
• Mortgage loans typically are structured so that most of what you pay in the first few
years is interest. And that interest is tax-deductible. As an example, let’s say that 90
percent of your $1,000 monthly mortgage payment is interest. That’s a deduction of
$900 a month. In other words, your taxable income is reduced by $10,800 a year. If
you’re in the 25 percent tax bracket, your deduction is worth about $250 a month.
(Thus, your $1,000 monthly mortgage equates to a $750 monthly rent on an after-tax
basis.)
• To reap the monetary reward of your mortgage tax deduction, you can either wait
patiently for a nice income tax return every year, or you can adjust your withholdings
from your monthly pay. Simply claim additional allowances on your W-4 form to see
your paycheck increase immediately. You can use the worksheet on the back of the W-4
to figure out how many allowances you should claim.
Your real estate taxes will, of course, depend on where you live. However they, too, are
tax deductible. And the Taxpayer Relief Act of 1997 allows married couples filing jointly to
earn up to $500,000 in gains on the sale of their primary residence, tax-free. Single
homeowners can earn up to $250,000 in tax-free gains. Again, check with a tax
professional on the specific guidelines and restrictions of this law.
Interest Rates Almost Better Than Ever
First-time home buyers can also take considerable comfort in the fact that mortgage
rates remain at historically low levels. Indeed, according to Freddie Mac, the weekly
national average rate for the standard 30-year-fixed mortgage in 2006 has stayed
between 5.85 and 7.18 percent. And adjustable rates are available at even lower rates
with payments fixed for the first one to five years. These rates rank among the best in
more than 30 years. From a cost perspective, there’s no better time to get a mortgage
than now. If you need confirmation, ask your parents what their mortgage rate was when
they bought their house 20 or 25 years ago. Believe it or not, it may well have been up to
10 percentage points higher than the rate you can get today.
Down Payments No Longer a Big Issue
Until the mid-1990s, coming up with the required 20 percent down payment to buy
a house was the biggest single obstacle to home ownership. That obstacle has since
been
shattered. First, lenders began offering mortgages for up to 95 percent of a home’s
value,
leaving only a 5 percent down payment. Then came the 97 percent loan-to-value (LTV)
mortgage. Now, qualified borrowers can get a mortgage for 100 percent of the value of
their home – or even more, if they want to finance the closing costs as well.
These low- or no-down payment loans have thrown the door wide open for first-time
home buyers who could never seem to save enough for that pesky down payment. Still,
there are a couple of important points to consider when deciding whether to take
advantage of one of these high LTV loans or trying instead to save a little more for that
initial down payment.
First, these low- and no-down payment mortgages come with a somewhat higher
interest rate than the loans available to those who can put down between 10 and 20
percent. But, again, mortgage interest is fully tax-deductible, so that shouldn’t be a big
concern. More important, perhaps, is that anyone who puts down less than 20 percent
usually must pay private mortgage insurance (PMI), which is required by lenders to
protect them in the event of a default on the loan. PMI typically adds a 0.5 to 0.75 percent
premium to your interest rate. Using our $100,000 hypothetical mortgage again, that
would tack on an extra $42 to $63 per month in PMI costs. Only after you have built 20
percent equity in your home can you cancel PMI, so it’s likely to be with you for a while
when you put little or nothing down to buy your home.
But there are ways to get around PMI even if you put down less than 20 percent.
Programs that combine an 80 percent first mortgage and a 10, 15 or 20 percent second
mortgage have been growing in popularity over the last few years due to the fact that the
buyer is not required to pay PMI. Many borrowers will qualify for these combination loans,
however, there are specific guidelines and credit qualifications necessary for this type of
financing.
Nevertheless, most would agree, though, that PMI is a fairly small price to pay
considering the substantial tax breaks and other benefits that home ownership affords.
Those tax breaks, combined with the historically low interest rates available today – and
the array of low-and no-down payment mortgages – comprise a resounding answer to
the question we posed at the beginning: To rent or to buy?
By all means, buy and buy smart. Before you decide to plunge into home ownership, it is
wise to find a reputable lender prior to contacting a real estate agent. Your Mortgage
Specialist will be sure that you are Pre-Approved by a Lender and not just pre-qualified
for a mortgage loan. Pre-Approval gives you a stronger negotiating point when dealing
with a Seller, and any reputable Realtor will require you to be pre-approved prior to
working with you on your search. If you decide to select your real estate agent before you
find a mortgage consultant, be sure to ask him or her for the name of a good mortgage
consultant who is familiar with the Federal Housing Administration (FHA) and HUD to
ensure that you have access to all loan options. There are many Lenders and Mortgage
Brokers that are not licensed to do FHA loans so be careful with whom you choose to
give your private information. Identity theft is at an all time high in this country and it is
best to work with a company that you can visit to ensure that your private information is
safe from predators. HUD approved Lenders must pass extra financial audits and
licensing requirements to ensure consumer protection.
Steve Felt has been in the Mortgage industry since 1998 and has worked in retail and
wholesale origination. Steve is a Certified Mortgage Planning Specialist, a distinction that
less than 1% of all Loan Officers have attained. Steve frequently instructs CFP’s and CPA’
s on Mortgage Planning techniques and is a member of the Tri-State Financial Planning
Association and the CMPS Institute. Steve can be reached at (856) 359-6366, by email
at steve@feltfinancial.com Be sure to check his website www.FeltFinancial.com for a
calendar of First Time Home Buyer seminars and more information on mortgages.
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