Buying vs. Renting

"Should we continue renting or go ahead and buy?" That's the question hundreds of thousands of Americans ask themselves every year.

It's not an easy one to answer. Emotions, family and personal reasons all come into play in any home-buying decision.

No one knows what the future holds for you, your family, your job or your finances. But we can help you understand what you're going to encounter when you embark on the sometimes-difficult journey toward the American Dream of owning a home.

Economic differences between renting and owning

If you're looking for the best return on your money, historically you're better off investing in the stock market than buying a house. Primary homes generally don't earn the investment return of financial instruments such as mutual funds. While the stock market's long-term average rate of return is in the range of 8 percent to 10 percent, housing has appreciated on average in the low- to mid-single digits for many years. That means you shouldn't buy solely to generate an investment gain.

On the other hand, Uncle Sam helps out by letting taxpayers deduct part of the mortgage interest and real estate taxes they pay each year. Borrowers get the benefit only if they pay enough in one year to exceed the standard deduction. But that usually happens, especially during the first few years of a mortgage when most of each payment goes toward interest rather than principal.

By the numbers ...

Say someone with gross annual income of $50,000 bought a home using a 7 percent, 30-year mortgage of $150,000 on Jan. 1, 2002. The monthly payment would be $998, excluding taxes and insurance, and this year, that borrower would pay $9,585 in interest. If he didn't have the mortgage, he would take a $4,700 standard tax deduction on his 2002 tax return (assuming he was a single filer). But by itemizing his mortgage interest, he would have $4,885 more to subtract from his income.

Sunny side of homeownership

Owners enjoy other benefits, too. They build equity over time as home values rise and their mortgage balances shrink. They also don't have to worry about their housing costs shooting through the roof because mortgage lenders can't boost borrower rates and payments, unless those borrowers have adjustable-rate mortgages.

Cloudy side of homeownership

When something breaks at an apartment, it's the landlord's problem. When your name's on the deed, it's yours. Someone who throws every penny into a down payment just because homeownership sounds like a good idea is taking a big risk because there's no money left to fix leaky pipes or buy a new air conditioner.

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