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Renting vs Buying a Home
It's been a dream for many people in Baie-Comeau: buying your own home. To most of us in Baie-Comeau, buying a home, not renting, is considered to be a measure of success. But renting has just as many positives as ownership, with perhaps less long term risk. Are you ready to own? Only you can decide that, but here are some ways to tell.
With all of the recent turmoil in the United States housing market, many people are revisiting the pros and cons of renting versus buying a home. For starters, buying a home is a terrific long term investment, and while short term price appreciation is unlikely, long term price appreciation is quite certain.
There are however many other factors to consider outside of potential price appreciation when deciding whether to rent or buy a home. While there are many advantages to owning your own home, not everything is a bed of roses. Like every major financial decision there are pros and cons to owning a home.
First of all, some of the positive attributes of home ownership:
Owning your own home does give you the discretion and flexibility to do whatever you want with your property both inside and out. Paint a room neon green? Sure. Have a life size statue of Elmo made out of corn cobs in the back yard? Go right ahead. You can do just about anything you want since you no longer have a landlord to answer to. However don't presume that you still don't have people to answer to about your behavior. Frequent parties or loud music, lack of maintenance on the house, or having a yard that is an eyesore will wear out your welcome with your neighbors faster than you can mutter "sack of moldy potatoes". You may no longer be living in an apartment complex with people on either side of you, but you're still part of a community.
There are also significant tax incentives to owning your own home. The interest that you pay on your home mortgage is tax deductible, as are the property taxes that you pay. However you can only benefit from these if you itemize your deductions (Schedule A on Form 1040) each year. Traditionally, the amount of home mortgage interest and property taxes paid is more than enough to allow you to itemize deductions, but check with your tax professional, or consult with online Internal Revenue Service publications at www.irs.gov.
If you have owned your home and it has been your "primary residence" (check the IRS website for the definition of a primary residence) for two out of the last five years, you are can have up $250,000 (if single) of $500,000 if married, of the gain on the sale of your home excluded from being taxed when you sell your home. Remember this is only if the home has been your primary residence for two out of the last five years.
Now a few of the negative aspects of owning your own home:
When anything that goes wrong in your home (and things will break, leak, fall apart), it is now solely your responsibility to repair it. There is no longer a landlord to call who will send out a repairman first thing in the morning. Leaky toilet? Dripping kitchen faucet? Hole in the roof? Nest of wasps on your front porch? Rabid squirrels rampaging unimpeded through the backyard? Guess what, unfortunately it's all your responsibility to fix. You should either have enough monthly income, savings, or a home equity line of credit to fix the anticipated, and unexpected things that will go wrong. And ask any home owner, they'll tell you, the costs of repairs and services are both regular and unexpected, and they are significant. Be prepared for them.
One more thing to consider, until you make that last mortgage payment, you don't own that property, the bank that holds your mortgage does. If you miss payments or encounter financial difficulties, the bank has the legal right to foreclose on the property or force you to sell it. Before you purchase a home, you should make absolutely sure that you can afford it for the duration of the mortgage. Buy a smaller house than you can afford so that you have some financial breathing room should you get laid off, injured on the job, or have an extended sickness that prevents you from working.
Keep in mind that there is no guarantee that your home will increase in value! Especially over the short term. Real estate prices across the US have shot up in the past few years, but are starting to settle back down, and in some place are now on the decline. Historically home prices have appreciated over the long term, and there has been no investment more certain to appreciate over the long haul than buying a home. But don't expect to purchase your home and have $60,000 in price appreciation in two to three years. It is incredibly dangerous to treat the equity in your home like a piggy bank and take out a home equity loan for use on a new car, vacations, or other non-essentials. Short term fluctuations in the real estate market could leave you owing more on your home than it is worth.
You also need to understand that there are significant impediments to exiting the market. If your life situation changes and you need to sell your home, it may take several months. With the real estate market currently in a state of flux, homes have stayed on the market much longer before selling. Realize that your home isn't a liquid investment that you can instantaneously cash out of if you need to.
Despite all the negatives there is no greater joy than owning your own home. The satisfaction of having a garden of fresh fruits and vegetables, painting a room a color you've always dreamed, or finally having a garage to park your car in is unparalleled. Just make sure to do your homework ahead of time, planning, budgeting, researching, and preparing. Understanding the positives and negatives of home ownership before you buy will leave you better prepared for the unexpected things that always pop up.
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