If you think you can't afford to buy a home consider this: The homeownership rate in the U.S. is nearly 69 percent — indicating that homeownership is within reach for more Americans than ever before. In fact, it can be as affordable as renting, and in some regions of the United States, it can be more affordable. To find out, you need to learn about home prices in the area you want to live, calculate what the mortgage would be and compare it to the cost of a similar rental.
While not right for everyone, the advantages to owning a home are evident for many. You can pay the same, or even less, while often building equity (the difference in how much the home is worth over how much you owe on it). In addition, you may be able to save on your federal taxes by deducting the interest paid on your mortgage. Information like this provides a great incentive for many to seriously explore their buying options.
You can compare the costs of owning and renting in any city in America by doing some basic calculations.
Choose a location and find out how much it would cost to buy the type of house you want. Most large real estate agencies maintain Web sites on which you can search for homes in an area. Find out your monthly mortgage payment using our payment calculator to get the total for principal and interest payments. Add taxes and insurance per month to get your total monthly payment to own the house. Check with the local property tax assessor to get an idea what the annual real estate tax would be on a home in your price range in your area. Check with a local insurance agent to get an idea of the annual homeowners hazard insurance cost. Divide each of those two numbers by 12 and add them to the principal and interest to get the estimated total monthly payment.
Using an apartment search Web site, such as http://www.apartments.com, locate a comparable house in the same location that is available for rent. When you compare costs, don't forget to subtract utilities if they are included in the rent.
How can you tell whether owning a home would benefit you? A good way to find out is by considering the ways homeownership can affect your life.
- Build equity — your wealth will increase as you gain more home equity
- Gain tax advantages — mortgage interest is tax deductible as per IRS code
- Stabilize your payments — monthly payments are relatively steady if your loan has a fixed interest rate, while your landlord can increase the rent
- Have a secure place for your family to live — a home provides a permanent place where your family can live and grow, and you can decorate or expand a house the way you like to create your dream home
- Gain a sense of community — homeowners often are more involved in the well-being of their communities; many homeowners work together for better schools and less crime
Maintenance costs — it takes work and money to keep a home in good condition
- Ties up your cash — selling the house may not be possible during the first few years of ownership; moving is more difficult and complicated and you may not have as much flexibility in choosing a new job location
- Can fluctuate in value — there is no guarantee that your home will increase in value; it could decrease in value
- Obligates your finances — when you buy a home, you are obligated to a set monthly payment
In the early years of your mortgage, the majority of monthly payments go toward paying the interest. Over time, an increasing amount goes toward reducing the mortgage balance or "principal." The process of paying off a loan over a set period of time is called "amortization." As you make payments, you reduce the principal and increase your share or "equity" in your home's value. If your home "appreciates" — increases in value over time — equity builds even faster. Building equity — or savings — in your home is important. For many people, it lets them plan for retirement, pay for college and achieve other future goals.
When you own a home, you can deduct mortgage interest and property taxes from your federal income taxes and some state income taxes. These deductions can mean significant tax savings, especially in the early years of the mortgage when interest makes up most of the payment. (You may want to consult a tax advisor for your individual situation.) After calculating your tax savings, you may find that it's cheaper for you to buy than rent. Keep in mind, however, that to gain these tax advantages, you must file an annual income tax return with the U.S. government, even if you're not a U.S. citizen.
Tax Information for First-Time Homeowners:
What You Can and Cannot Deduct:
If you choose a fixed-rate mortgage, you'll pay the same monthly principal and interest for the entire term of your loan. (The payment can go up slightly if your property taxes and insurance costs go up.) Unlike renting, your monthly payment will stay the same month after month, even when inflation leads to higher prices.
When you own a home, you can be secure in knowing that your family and if need be your relatives will have a place to live. When you rent, you may not always be able to renew your lease.
Maintaining the value of your home gives you a reason to care about your neighborhood conditions. You may want to get involved to ensure the well-being of your community, and you may feel a sense of belonging.