Renters: buying now could be a smart move


(MoneyWatch) When you own your home, you still in effect pay rent. While renters make monthly payments to a landlord, homeowners pay rent in the form of mortgage interest (in essence, a loan is a rental of money from a lender) and property taxes. But with rents creeping upward and the cost of "renting money" from the bank at historically low levels, the scales have tipped in favor of buying.

Before joining the ranks of homeowners, you'll have to get your ducks in a row: You've decided to stay in one location for a few years, you have a secure job and income, and you have saved enough money for a down payment.

For first-time home buyers, the down payment is the initial hurdle. The median price of an existing home is about $185,000, and lenders require ten to 20 percent down, so you'll have to put aside at least $25,000 to acquire any real estate.

You should also ponder the financial costs of home ownership versus renting. Consider the following scenario: Let's say your current rent is $1,100 per month. You would like to buy a home for $185,000. So you'll need $25,000 in cash -- possibly more -- to make a down payment and an additional $4,000 for the closing costs if you are to gain approval of a mortgage in the amount of $160,000. With the average rate of a 30-year fixed-rate mortgage, or 30-year FRM, at a 3.5 percent, your monthly payment will amount to about $720. Property taxes will depend on local tax rates, but assume they'll run to about $250 per month, and home insurance would add about $100 per month. So the total for mortgage, taxes and insurance will clock in at about $1,100 -- the same as your current monthly rent.

Home ownership does come with some tax benefits. Specifically, for those whose incomes fall below certain thresholds -- less than $300,000 for married filers and below $250,000 for single filers -- tax deductions can be claimed for mortgage interest and property taxes. (Those at higher income levels may lose up to 80 percent of their itemized deductions, which include mortgage interest and property taxes.)

Using figures from the above scenario, the additional itemized deductions for mortgage interest and property taxes could reach $8,500. At a 25 percent marginal tax bracket, the tax savings could amount to as much as $2,100 per year. When this is weighed against your monthly mortgage payment and cost of taxes and insurance, you could wind up paying less than your current monthly rent.

Of course, there are two sides to every story. Owning your home does have the advantage of building equity through mortgage pay-down and price appreciation. And as the homeowner, you can remodel, paint and make any changes you like. On the other hand, in taking on property, you make yourself vulnerable to rising costs of property taxes and utilities and take on responsibility for maintenance. And then there is the potential pain of the sales process should you want to move or if  you are forced to relocate.

And let's not forget that the mortgage payments for the first several years pay down very little principal, which means the amount you owe will remain virtually unchanged for a time. Moreover, if you are forced to sell and the value of your home has fallen, you may wind up owing money when you sell it.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.