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Your home: rent or own?
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January 5, 2000: 6:28 a.m. ET
Be sure to compare apples with apples when figuring out what’s best for you
By Staff Writer Nicole Jacoby
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NEW YORK (CNNfn) - With interest rates at historic lows and the housing market continuing its robust trend, writing that rent check every month might be getting harder and harder.
But before you decide that your apartment is a foolish depletion of hard-earned cash, you should look closely at how much owning a home will really cost you.
"A lot of people think: ‘I don’t want to keep renting. Renting is like throwing money away,’” said Eric Tyson, a financial counselor and author of Home Buying for Dummies. "But that’s not necessarily accurate.”
For certain people, home ownership may simply be a bad fit. For instance, if the thought of replacing old appliances, landscaping and making routine repairs seems more than you can bear, you may not be ready to take the plunge.
More importantly, if you don’t know where you will be one, two or even three years from now, buying a home may not be worth your while. The transaction costs, such as loan fees and title charges, make buying a home an expensive undertaking. You’ll have to see about a 15 percent appreciation on your property to make up for these costs, according to Tyson, even taking into account tax breaks.
Ideally, a prospective homeowner should be planning on owning the home for at least five years.
In addition to transients, individuals who need to keep a high level of liquidity may not be good candidates for buying a home.
"Somebody whose dream it is to start their own business (for instance) does not want to sink their savings into real estate,” said Tyson. "That’s just more of a weight around their neck.”
Finally, someone whose rent is significantly below market value might want to sit tight for the simple reason that buying will cost more.
Doing the math
Some simple mathematics will help you determine whether or not it pays to buy.
Identify the type of property you want to purchase and sit down with a financial counselor, a good reference book or appropriate computer software to figure out what the monthly cost of buying versus renting is.
Don’t forget to take into account relevant tax breaks, which can greatly reduce your annual costs.
"You really need to look at the after-tax cost of owning that home and make sure you are comparing apples with apples,” said James F. Smith, the chief economist for the National Association of Realtors.
For one, Uncle Sam lets you write off the interest paid on the mortgage of your first or second home. Real estate taxes imposed by state or local governments are also usually tax-deductible. In many cases, these deductions alone will take you above the minimum itemized deductible, giving you the leeway to write off many other items.
First-time homebuyers will also see additional tax savings the first year they purchase their house or apartment. Many of the costs and settlement fees incurred at closing may be deducted in the tax year the home is purchased. That includes certain real estate taxes, mortgages, interest and points that meet certain requirements.
And the benefits don’t end there. As long as you live in your home two out of five years, you can avoid taxes on up to $250,000 -- or $500,000 if you are married and filing jointly -- of profit from the sale of your home. If you decide to buy another home of greater or equal value within two years, you won’t pay taxes on the profit of selling your home at all.
Avoid the tax trap
But lower taxes are no reason to swear off renting forever.
"Don’t ever buy a house just for tax reasons,” said David Mellem, research manager of the National Association of Tax Practioners. "You have to look at all the extra money you might be spending that you are not getting back in taxes.”
Depending on the home you buy, you may have to shell out hundreds - even thousands -- of dollars for new appliances, routine repairs or landscaping.
Mellem also warns against buying a more expensive house simply to get bigger deductions.
"They might be paying an extra $10,000 in interest and only saving $2,800,” he said. "So they’re still spending $7,200 more than they planned and what are they getting for it?” In other words, unless spending that extra amount increases the resale value of your home or provides you with amenities you feel you can’t live without -- a swimming pool, an extra guest room or nicer carpet and wallpaper -- don’t bother.
Other considerations
One of the biggest advantages of home ownership is that it allows you to build up your net worth. Unlike rent payments, a portion of the money you pay goes toward building equity, the difference between the market value of a house and the amount still owed on the mortgage.
As you pay off the mortgage, you owe less on the home and own a larger share of it. Building equity is important because it helps you qualify for other loans, such as college or car loans.
But purchasing a home does not guarantee increased net worth.
"Building equity is a good thing, but it cuts both ways,” said Tyson. "If you buy into a housing market and prices go down, you could lose 100 percent of your investment.”
While predicting the real estate market can be difficult, you should probably do some research about whether properties in the neighborhood you are considering are set to appreciate.
Smith recommends arming yourself with information about local schools -- even if you don’t have children -- as well as highway building plans and other factors that might influence the property’s value in the future.
Finally, you have to ask yourself whether you are ready for the responsibility of owning a home.
"If you tend to be irresponsible, you may just be better off renting,” said Smith only half-jokingly.
If you’ve let a few credit card payments slip in the past few years or you have a lot of outstanding debt, such as a car loan, you are less likely to qualify for a home loan.
But "the most important thing is that you’ve got the down payment and you’ve got the income stream to carry the mortgage,” said Tyson.
If that’s all in order, there’s little that should stand in your way. 
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