Buy Instead of Renting When You Have the Down Payment

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.