Buy vs Rent
INearly a third of households are still renting. If you’re one of them, you could be paying a hefty price. Before talking about purchasing a house, it’s important to note two things.
First—and this is extremely important—the housing market is actually localized. So the outlook in your hometown may be different than another city across the state or on the other side of the country.
Second, home prices are tied to employment. For example, if someone feels like their job is in jeopardy, it might be enough to stop them from making a move. So, if your local job market is feeling a pinch, the home prices in your area may be down as well.
But with those factors under consideration, it still makes sense to buy instead of rent. In fact, renting may be costing you a bundle.
Let's look at an example…
If you are paying rent at $1,500 per month and your landlord increases your payment by a modest 5% each year, you would wind up paying just about $100,000 over a 5-year period! Worse yet, after forking over $100,000, you still would have nothing to show for it.
In addition, any improvements you make to a rental property will only benefit the landlord. It's not uncommon for renters to freshen up the paint, install new light fixtures or plant some nice flowers outside. Unfortunately, those improvements can’t be taken with you when you move.
With convenient down payment options still available for qualified buyers, affordable home prices and low interest rates, the very same money could be leveraged toward home ownership.
Even using a standard 30-year fixed program, a mortgage of $300,000 could be obtained with a total monthly mortgage payment—including property taxes and insurance—of around $2,200. Assuming a 25% tax bracket, this would be equivalent to the average amount spent on rent during the same period after your tax benefit.
And the benefits of home ownership are quite considerable. Because the mortgage is being paid down each month, equity is being built. After 5-years, the $300,000 mortgage could be reduced to $279,000, potentially adding $21,000 to your net worth!
But if laying out the initial increase in monthly payment and having to wait for your tax benefit to show up next April is a tough nut to crack, the IRS wants to help. Instead of waiting to file for the tax benefits derived from your new home purchase, you can simply adjust the amount of your withholding. This allows you to have less tax withheld from each paycheck so you can handle the new mortgage payment more comfortably throughout the year. In essence, you are taking your tax refund as you go instead of letting Uncle Sam hold it all year, interest free.
Visit www.irs.gov and use the IRS withholding calculator. This very handy tool can quickly show you the impact that a change in withholding will do to your net paycheck. Remember to balance this with the expected refund, and it is always a good idea to check with your tax advisor.