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To rent or to buy?
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October 29, 2001: 9:47 a.m. ET
With interest rates at historic lows, now's the time to weigh your options.
By Staff Writer Annelena Lobb
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NEW YORK (CNNmoney) - If you don't already own a home, chances are you're busy fending off friends and family urging you to take the plunge now. It's a rate-friendly environment, after all, and you don't want to miss out on one of the best investments money can buy.
So goes conventional wisdom. The truth is, however, purchasing a home isn't always wise. There are plenty of occasions when renting can cost you less in the long run.
"There are many advantages to owning your home - but we do think that sometimes the advantages to renting are overlooked. Neither owning nor renting is the right choice for everybody at all points in their life," said Mark Obrinsky, chief economist at the National Multi Housing Council (NMHC), an industry group that advocates rental housing.
Deciding whether you should rent or buy the roof over your head depends on your finances. It also depends on how flexible you are and how long you plan to stay in the home.
Honey, I'm home
Housing expenses include both shelter costs and investment costs.
Renters pay only shelter costs, while owners pay both. Renters also have greater flexibility to move and more predictable payments - they won't have to shell out cash for leaky pipes or refinishing the floors. But owners reap the benefits of tax breaks and property value appreciation.
The greatest financial advantage to renting: avoiding hefty upfront fees like a down payment and closing costs, which are facts of life for the buyer and can cost upwards of $20,000 combined. MetLife Consumer Education notes that a down payment is typically 5 percent to 20 percent of the purchase price.
"When you buy, you'll put down a large chunk of your savings upfront, which is also money you now can't invest anywhere else," NMHC's Obrinsky said.
If you don't plan to stay in your house for a minimum of five years, you may not want to pay those transaction costs. If your job is likely to send you to London next year, for example, chances are your home won't have appreciated enough to offset closing costs.
"If you can find a place to rent that's close in quality to something you'd buy, the cost of renting tends to be slightly less," said Obrinsky.
As such, if your only criterion is quality of housing, and especially if you don't plan to stay long, go ahead and sign that lease. You'll avoid transaction costs and you can allocate your investment dollars into something more liquid, like stocks or mutual funds.
Trading up
For most renters, buying their first home means a reduction in lifestyle, moving to a smaller place and perhaps a less expensive neighborhood, according to iown.com. If you're stuck on a particular neighborhood, but can't afford to buy a place, you may want to rent there until you've saved enough to buy.
But you also could buy your almost-dream house somewhere less glam and trade up in a few years. The key consideration, again, is how long you plan to stay. Renting indefinitely isn't the most financially savvy move. And real estate professionals say if you're planning to stay somewhere for five years or more, think hard about buying.
Unlike renting, buying a home provides a savings vehicle.
"People today have problems saving for their future. One in eight homeowners has a second mortgage on a home. But the other seven are saving and building equity in their homes," says John Stefek, vice-president of e-commerce at CitiMortgage.com and manager of iown.com. "When you buy, you're paying toward something you own, and you build equity every month."
Besides the built-in piggy bank, your down payment is an investment. If you put $20,000 down on a $100,000 house and its value rises to $130,000 over a 10-year period, you'll not only get back your $20,000 when you go to sell it, but you'll also receive the $30,000 it has appreciated.
Yes, some homes do depreciate - but that's the exception, rather than the rule. According to the Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae and Freddie Mac, single-family home prices appreciated nationwide at an average 8.6 percent rate for the year ending June 2001 - far better than most mutual funds fared. They've tracked the nationwide average since 1976, and the figure has always been positive.
Taking the plunge now
Today's uncertain economy doesn't turn the tide entirely in favor of renting or buying. While interest rates have fallen, the job market is fragile, so think twice before you make a financial commitment like a mortgage.
"Mortgage interest rates aren't dropping because of the interest rate cuts, but because of the anticipated economic slowdown and the lack of inflation," said Bob Barr, director of economic research at homestore.com. "Mortgages are often priced against 10-year Treasurys, and those rates have fallen as well." That means it may be a wise time to buy, Barr said.
This week, the 30-year fixed mortgage rate stands at 6.76 percent. This week last year, the same rate was 7.24 percent. On a $150,000 mortgage, that decline means each monthly payment would decrease from $1022 to $974, resulting in annual savings of almost $600.
But a weak economy also means job loss and relocation are more likely. "Mortgage rates have dropped, yes, but a weak economy means people lose jobs or feel insecure in their jobs. Some potential buyers may end up backing off from a purchase," NMHC's Obrinsky said. "When the economy picks up after a slowdown, interest rates usually rise, but that doesn't stop people from buying."
Next April 15
Tax advantages generally favor homeowners. Mortgage interest and property taxes are 100 percent deductible on your federal income tax return, and many homeowners save thousands of dollars each year.
Double-check, though, before you assume you'll get extra money back. Those deductions benefit only homeowners whose total itemized deductions exceed their standard deduction. For the 2001 tax year, that figure rose to $4,550 for singles and $7,600 for married couples filing jointly.
It's also worth noting that homeowners who sell their property pay no capital gains tax on the profit, as long as they lived there for two years out of the last five. Before 1997, homeowners paid capital gains tax on any profits from selling their home, unless the money was used to upgrade into a larger home. One caveat: You will still pay capital gains tax if you're single and make more than $250,000 on the sale, or married filing jointly and make more than $500,000. 
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