Buy a home, build equity and save money on your taxes. It’s the American dream.
For some, however, that dream just doesn’t make fiscal sense.
“Just because you’re paying less taxes, doesn’t mean you’re necessarily better off owning a home,” says Mitchell Levy, author of “Home Ownership: The American Myth,” a book that bucks the notion that owning a home is financially better than renting.
Many renters have gone so far as to turn their backs on the homeownership myth by choosing to rent while investing their down payments and life savings in other, more profitable, ventures.
“The lifestyle discretionary renters are people who choose to rent,” says Jim Bowe, vice president of the National Multi Housing Council, an apartment industry organization. “They are often one-person households or two-career households who value the convenience and economic safety of renting.”
In one sense, everyone is a renter.
“If you are a homeowner, you are truly just a renter because you may not be paying rent to a landlord, but you’ll be paying it to a bank,” sayys Michael Evans, national director of the E&Y Kenneth Leventhal Real Estate Group in San Francisco.
“Even if you don’t have a mortgage, you’re paying rent to yourself”–the amount of money you’d be earning if your funds weren’t tied up in the house.
The key, then, to deciding to rent or own is determining which “rent” will be cheaper over time: the one you pay to the bank as interest on your mortgage or the one you pay to your landlord.
This determination usually comes down to how much a house will appreciate, something even experts can’t agree on.
“When you first buy the house, the very first minute you own it, it’s only worth 94 percent of what you paid because you’ll have to pay the 6 percent commission to the broker to sell it,” says Levy. “Which means the house needs to appreciate by at least that amount to break even.”
In high-priced housing markets especially, renters have less purchasing power.
“People only have so much money to spend,” says Evans, “so they settle on buying a smaller house than they would if they lived in another part of the country.”
And even with an educated guess of how much a house will appreciate, based on thorough research of the neighborhood, schools and past performance, home buyers, especially those who plan to sell within 10 years, can get burned if the economy takes a sudden dive and housing prices plummet.
But what about the tax breaks? It seems like that would be one area where homeowners make out like bandits.
“Most people are shocked when they find out how much total interest they will pay over the life of the loan,” says Levy.
Levy uses this guideline for estimating the interest-to-principal ratio on your mortgage payment: in the first year, 11 payments will go toward interest and one payment toward principal. According to Levy, more than 50 percent of your mortgage payment will go toward interest for 21 years of a 30-year mortgage.
“The tax break certainly helps homeowners,” Levy admits, “but it may not be worth it if you have to spend $1 in mortgage interest in order to save 28 or 33 cents in taxes,” depending on your tax bracket.
Homeowners also face expenses that renters don’t have to worry about.
`Hungry mortgage’
At least in the beginning, first-time homeowners often feel “house poor.” They can’t take vacations or buy a new car because all their savings and disposable income are tied up in high mortgage payments.
“You can become a slave to your home,” says Steven A. Lyons, author of HomeBuyer, a book and software home buying kit. “You have to keep earning more money to feed this hungry mortgage.”
And then there are the unexpected expenses.
“First-time buyers usually think in terms of coming up with the down payment and the monthly payments,” says Myron Moskovitz, co-author of Tenants’ Rights, a Nolo Press self-help law book for renters. “But you have to think about repairs, property taxes and insurance. You may not realize that in the winter the basement will flood and the roof will leak.”
Utilities can be more expensive in a house than in an apartment.
“Typically, apartment buildings give something away for free, whether it’s electric, water, gas or garbage,” says Levy. “There will be some bill or set of bills you’ll have to pay (in a house) that you haven’t had to pay as a renter.”
Property taxes also can be deceiving, says Moskovitz.
“Taxes can be higher than what the previous owner was paying because they’ll shoot right up, once you buy at the new price.”
In addition to homeowners insurance, you may need earthquake or flood insurance. And if disaster strikes, insurance probably won’t cover all your losses.
Maintenance is constant. It can also be expensive if you’re not handy around the house. Hiring a gardener can add a considerable amount to your monthly cash outlay and paying the plumber might be enough to break the bank in a bad month.
Then there’s the nuisance factor. Even if the home is fully insured, the homeowner can’t just call the landlord when the toilet overflows or a tree falls on the roof. Instead, the homeowner has to make the phone calls, meet the adjuster and be there to let in the workers.
Many homeowners view their mortgage as a forced savings account because they probably wouldn’t save their money otherwise.
Owning equity
“The biggest problem with renting and saving for 30 years, is being disciplined enough to be able to do it,” says Levy. “For a lot of people, if you’re going to buy a house, at the very least, you now own equity for whatever the house is worth. Even if it has lost value, it’s still worth something, which may be more than if you had rented and couldn’t save.”
But the forced savings theory only works if you’re in it for the long haul–10 to 15 years at least.
“If you do plan on leaving or have the kind of job where you might get transferred, buying a house can be risky,” says Moskovitz. “Renting gives you a lot of flexibility. You can get out on a month’s notice with a month-to-month rental agreement.”
And in today’s climate of downsizing and layoffs, employment security is a thing of the past. Many professionals can’t say where they will be in five years, let alone 10 to 15 years.
With this uncertainty, more and more people are resisting homeownership’s appeal and becoming renters by choice. They are capable of purchasing a home but have decided to rent to avoid the pitfalls of long-term debt.
Resources
– “Tenants’ Rights,” by Myron Moskovitz and Ralph Warner (Nolo Press, 1997; $18.95).
– “Home Ownership: The American Myth,” by Mitchell Levy (Myth Breakers, 1993; $11.95). For more information: contact mlevy@mythbreakers.com or http://www.mythbreakers.com.
– “HomeBuyer: The Book & Software Home Buying Kit,” by Steven A. Lyons (Stratosphere Publishing, 1995; $27.95); visit the Web site for discount at http://www.StratoPub.com.
