If You Can Afford the Down Payment Buy the Home, Don't Rent
Real estate in most US today is not a top investment compared with investment securities. You're not going to get a 30 percent return on your house in America. In the past decade, people have been advised to think of a home.
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.
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% of that payment goes to interest and is therefore tax deductible. In the 15% tax bracket, the homeowner saved about $375 more in taxes with the home provision versus with only a standard deduction.
Some people take a middle road. They ease into homeownership by renting a house or condominium with an option to buy.
- It can work in a buyer's favor in areas where real estate values are rising quickly at a rate of 10% 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.
- Lease-purchase gives a buyer time to save for a down payment or to clean up a credit history.
- 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.
- 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% to 100%, based on your contract.
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.