| After looking at all the costs involved in
buying house, you may have begun to have second
thoughts: Perhaps, it is better to rent a home.
Real estate in most areas today is not a top
investment compared with investment securities.
"You’re not going to get a 30 percent
return on your house," said Steve O’Connor,
senior director of residential finance at the
Mortgage Bankers Association of America. In the
past decade, people have been advised to think
of a home "as shelter not investment,"
O’Connor said. "Wealth accumulation
is secondary."
Still, as shelter, most experts say if you can
afford the down payment, it makes sense to buy
your home rather than rent it. That’s because
you can deduct mortgage interest on income tax
and build equity in your property. This is especially
true when mortgage interest rates are low. Mortgage
interest rates are deductible up to a $100,000
annual limit.
Example
A homeowner has a gross annual income of $40,000.
The monthly mortgage payment is $1,000 on a 30-year
mortgage. In the first few years, 80 percent of
that payment goes to interest and is therefore
tax deductible. In the 15 percent tax bracket,
the homeowner saved about $375 more in taxes with
the home provision versus with only a standard
deduction.
Lease-purchase agreements
Some people take a middle road. They ease into
homeownership by renting a house or condominium
with an option to buy.
• Lease-purchase gives a buyer time to
save for a down payment or to clean up a credit
history.
• It can work in a buyer’s favor in
areas where real estate values are rising quickly
at a rate of 10 percent a year. A buyer benefits
from this appreciation because the purchase price
of the home is locked in on the day the buyer
signed the rent-to-own contract with the seller.
• In most agreements, the seller allows
a portion of the rent to be applied towards the
purchase price, which some lenders consider to
be part of the down payment. The amount of rent
credited could be 10 percent to 100 percent, based
on your contract.
• Most rent-to-own options require some
down payment to secure the agreement, which is
not refundable in case the renter decides not
to buy.
Homeowners who would agree to a lease-purchase
option include people who have had property on
the market longer than they wish or owners who
had to move and want the house to be lived in.
The owner benefits with rental income to help
pay the carrying costs of the home, and the strong
possibility of selling the house when the contract
expires.
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