If you are considering renting your next residence or buying, consider the following key points.
The first factor is the actual occupancy costs of the home. You either pay rent to your landlord or make a mortgage payment to your lender. The median price of a home in our market runs around $130,000, so with an FHA loan interest rate currently running 4 percent or less, the principal and interest payments each month would run less than $600 per month on a 30-year mortgage with 3.5 percent down.
Granted, there are other costs associated with the monthly payment of a mortgage such as property taxes, insurance and private mortgage insurance (required when you borrow more than 80 percent of the value of the property). But in most comparisons of renting a three bedroom, two bath home vs. owning, the homeowner comes out with the lower monthly occupancy expense.
Another thing to consider is the value of an appreciating asset. While home prices corrected in 2009 and 2010, they stabilized in the 2011. Year to date, median price of homes sold in the Greater Chattanooga Area have increased by 4 percent when compared to the same period last year. While there may be temporary corrections in home values, after a run up, over the long haul home values have shown steady appreciation. Can you say that for the car parked in your driveway or any other major purchase you have made recently?
Inflation is another factor to take into account when comparing rental vs. home ownership. While home prices declined in 2009-2010, rental rates increased every year. When you are a homeowner and there is inflation of the home value, then you benefit with an increased value to your asset. When you are a tenant and there is inflation, your rent goes up. With a fixed rate mortgage, your principal and interest payment is fixed for up to 30 years.
How long is your rent payment fixed?
There are tax advantages to owning a home that should also figure into your occupancy costs. The interest you pay to your lender each year for using their money is tax-deductible.
This mortgage interest tax deduction reduces the amount of taxable income you report to the government. In addition, the property taxes associated with your property reduce your income tax liability.
What about the intangibles of owning a home, such as privacy when compared to an apartment or duplex and the ability to make improvements that you choose vs. asking the landlord for permission? While it may be nice to call the landlord when something breaks in your rental, I have to believe when you add up the pros and cons, homeownership wins out every time.
Mark Hite is president of the Greater Chattanooga Association of Realtors