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I am trying to figure out if owning a home is more economical then renting. According to all the tools, according to the rent I pay now (< $800) owning a home is not economical, even in the long run. It seems to me like it would make sense to do it eventually, but until I am renting a place greater than $1200/month, I don't see the purpose. A couple of specific questions that I have:

  1. Is all interest on a first time home deductible on taxes? What does that even mean? If I pay $14,000 in taxes will My taxes be $14,000 less. Will my taxable income by that much less?

  2. I have heard the term "The equity on your home is like a bank". What does that mean? I suppose I could borrow using the equity in my home as collateral?

  3. Are there any other general benefits that would drive me from paying $800 in rent, to owning a house?

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    You need to specify your country. Interest is not deductible in most countries, though it is in the U.S. You'd also want to list how much your mortgage payment would likely be, or how much homes cost in your area. If you can buy one for $100,000, that'd be radically different from needing, say, $500,000 for a home. – ChrisInEdmonton Sep 8 '14 at 16:44
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    New York times has a good calculator for this. nytimes.com/interactive/2014/upshot/… – Myles Sep 8 '14 at 19:14
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    From OP's other question, I trust he is still in the US. If he reports otherwise, we can adjust country tag. – JTP - Apologise to Monica Sep 8 '14 at 22:46
  • Where in the US can you rent a place for only $800 a month? I've lived in urban, suburban, and rural areas in the last few years, and I've never paid less than $1100/mo in any of them. – Joe Sep 9 '14 at 0:47
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    People tend to make sweeping statements based on general ideas (building equity and the like) but in actual fact the specifics matter a lot and you can't give an absolute answer. The reason it might be beneficial to buy a home in a specific context are mostly tax incentives and a dynamic (or “bubbly”) housing market, which can compensate the cost of the mortgage and real estate transaction everything else being equal. – Relaxed Sep 9 '14 at 8:52
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Is all interest on a first time home deductible on taxes? What does that even mean? If I pay $14,000 in taxes will My taxes be $14,000 less. Will my taxable income by that much less?

If you use the standard deduction in the US (assuming United States), you will have 0 benefit from a mortgage. If you itemize deductions, then your interest paid (not principal) and your property tax paid is deductible and reduces your income for tax purposes. If your marginal tax rate is 25% and you pay $10000 in interest and property tax, then when you file your taxes, you'll owe (or get a refund) of $2500 (marginal tax rate * (amount of interest + property tax)).

I have heard the term "The equity on your home is like a bank". What does that mean? I suppose I could borrow using the equity in my home as collateral?

If you pay an extra $500 to your mortgage, then your equity in your house goes up by $500 as well. When you pay down the principal by $500 on a car loan (depreciating asset) you end up with less than $500 in value in the car because the car's value is going down. When you do the same in an appreciating asset, you still have that money available to you though you either need to sell or get a loan to use that money.

Are there any other general benefits that would drive me from paying $800 in rent, to owning a house?

There are several other benefits.

  • Capital appreciation - If your house you own goes up in value, you benefit from that increase.
  • Monthly cost security - You bought the house for a certain price. That dictates your monthly payment. If you rent and all real estate values go up, your rent will likely go up.
  • Paying off a mortgage - No more monthly debt payment. This can radically reduce how much it takes for you to live comfortably for a month if you have no additional housing payment.
  • Freedom of choice - you can change most things in the house as you desire
  • More choice of housing type - $800 rent sounds like an apartment. If you want a house, it is sometimes easier to purchase rather than rent. If you want to long term rent a house, you need to find a land lord that is interested in long term renting and not just waiting for the next real estate up-tick.
  • More choice of neighborhood (and school district) - Not every neighborhood has a rental available in it.

These are a few of the positives, but know that there are many negatives to home ownership and the cost of real estate transactions usually dictate that buying doesn't make sense until you want to stay put for 5-7 years. A shorter duration than that usually are better served by renting. The amount of maintenance on a house you own is almost always under estimated by new home owners.

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    The second point kinda assumes that the house is not a depreciating asset? Even if it's an appreciating asset, the fair comparison would be whether I'd gain more by putting $500 into my mortgage vs in other investments. If house does appreciate but not as much as stock index, for example, then putting money into the house is worse. – Heisenberg Sep 8 '14 at 18:25
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    The illiquidity of the investment should also be considered as a factor. Do commissions of 6% on a sale enter into the investment equation? Only if you plan to move I suppose. – NL - Apologize to Monica Sep 8 '14 at 18:30
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    Some negatives: A house can lose value (vide the Great Recession). Your taxes and insurance can go up. Until you pay off the mortgage you have larger monthly payments. Your money's tied up in the house rather than in other investments which may appreciate as much or more. If you want to move (eg for work), a house is an anchor. ... The time to buy a house is when you can afford one and Really Want To Live In That House; the financial arguments all have counter-arguments. I rented until I was 50, which is why I had the option of paying cash for my house. (I did borrow 50% at insanely low rate.) – keshlam Sep 8 '14 at 18:31
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    @keshlam I'd be careful stating that houses with a mortgage have larger monthly payments than apartments. I was able to move from an apartment paying >$700/mo to a house with a combined mortgage/escrow payment of ~$600. Maintenance does eat up some of that, but in the end I'm still coming out ahead. Not always the case, but it does happen. – kingofzeal Sep 9 '14 at 20:19
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    Not to mention that people who own a house may use services of other businesses in the area relating to house ownership: lawn service, roofing, plumbing, electrical, etc. More money is then spent on the local economy. Whereas a renter won't spend that. – Brian Sep 10 '14 at 12:31
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Altough this may vary a lot depending on where you live and your actual finance, here what convinced me buying a home instead of renting :

  • A part of what you pay each month is an investment (the other part are only interest)
  • "The equity on your home is like a bank" mean that you can borrow at any time as much as you've already paid. Depending on your financial institution, conditions may vary. For example : mine will allow that only after the first 20% is paid. This will allow you to easily borrow money for further project without paying a high interest rate.
  • Your investment can take a lot of value with a good maintenance, once again it depends on where you live etc. In my case, I bought my house 20% under the municipal evaluation where most of them goes for at least 10% over and the investment of renovation is way less than the profits it will bring.
  • Depending on where you live, owner can have some subvention for renovation, ecological economy, tax deduction etc.
  • You can also consider renting a part of your house which would help you pay the mortage.

Other benefits :

  • The yard/outdoor spaces which normally is not included with an appartment.
  • The tranquility of being alone.
  • You can do any renovation/project without asking the owner.
6

To add to what other have stated, I recently just decided to purchase a home over renting some more, and I'll throw in some of my thoughts about my decision to buy. I closed a couple of weeks ago. Note that I live in Texas, and that I'm not knowledgeable in real estate other than what I learned from my experiences in the area when I am located.

  1. It depends on the market and location. You have to compare what renting will get you for the money vs what buying will get you. For me, buying seemed like a better deal overall when just comparing monthly payments. This is including insurance and taxes.

  2. You will need to stay at a house that you buy for at least 5-7 years. You first couple years of payments will go almost entirely towards interest. It takes a while to build up equity. If you can pay more towards a mortgage, do it.

  3. You need to have money in the bank already to close. The minimum down payment (at least in my area) is 3.5% for an FHA loan. If you put 20% down, you don't need to pay mortgage insurance, which is essentially throwing money away. You will also have add in closing costs.

I ended up purchasing a new construction. My monthly payment went up from $1200 to $1600 (after taxes, insurance, etc.), but the house is bigger, newer, more energy efficient, much closer to my work, in a more expensive area, and in a market that is expected to go up in value. I had all of my closing costs (except for the deposit) taken care of by the lender and builder, so all of my closing costs I paid out of pocket went to the deposit (equity, or the "bank"). If I decide to move and need to sell, then I will get a lot (losing some to selling costs and interest) of the money I have put in to the house back out of it when I do sell, and I have the option to put that money towards another house.

To sum it all up, I'm not paying a difference in monthly costs because I bought a house. I had my closing costs taking care of and just had to pay the deposit, which goes to equity. I will have to do maintenance myself, but I don't mind fixing what I can fix, and I have a builder's warranties on most things in the house. To really get a good idea of whether you should rent or buy, you need to talk to a Realtor and compare actual costs. It will be more expensive in the short term, but should save you money in the long term.

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@Alex B already answered the first question. I want to respond to the second and third:

I have heard the term "The equity on your home is like a bank". What does that mean? I suppose I could borrow using the equity in my home as collateral?

Yes, you can borrow against the equity in your home. What you should keep in mind is that you can only borrow against the amount that you've paid on your house. For example, if you've paid $100,000 against your house, you can then borrow $100,000 (assuming the value hasn't changed). The argument that this is a good deal misses the obvious alternative: If you didn't spend that $100,000 on a house, then you'd still have it and wouldn't need to take out a loan at all.

Of course, equity still has value, and you should consider it when doing the cost/benefit analysis, but make sure to compare your equity to savings you could have from renting.


Are there any other general benefits that would drive me from paying $800 in rent, to owning a house?

Economically:

  • Your recurring costs (interest payments, insurance, HOA fees if applicable, maintenence) may be cheaper than rent if you're living in an area with high rental costs compared to house prices. (Alternately, those fixed costs may be more expensive if you're living in an area where it's cheap to rent) The calculator @Myles found can help with this, although it makes a lot of assumptions that might not apply to you.
  • Your utilities may be cheaper if your new place is more efficient, and if your landlord wasn't paying them. (Or, your utilities might be more expensive, if your new place is larger, less efficient, or if your landlord previously paid them)
  • You might be able to save some money by moving less often. (Or you might spend significantly more money moving if you decide you don't like your new house)
  • You might end up with a higher net-worth, since the house payments are required and not optional like normal savings. (Although, houses are a poor investment and you might do better with index funds if you have the self-control for it)

As you'll notice from my parenthetical remarks, this is extremely situational. It might be good to come up with a spreadsheet for your situation, taking all of the costs into account, and see if you end up better or worse.

Also, there's nothing wrong with buying a house for non-economic reasons if that's what you want. Just make sure you're aware of the real cost before you do it.

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It is almost a sure thing that the housing market will crash again hugely.For this reason I prefer to own several houses that way when it does no one can ask for their money back and leave me homeless.

Current economics suggest a fall of between 40-60% from 2011 prices meaning that if you have bought a house in the last 12 years you can wave bye bye to any and all equity, and this will happen very soon.

I recommend saving your money and buying a house outright (like I did 3 times) from someone who has spent 12 years or so paying a mortgage.

  • Your situation is not atypical. – Brian Sep 9 '14 at 20:16
  • In which market are we going to see this crash? Markets vary from state to state, city to city. Also, if you're worried about a market correction, shouldn't you be selling most of your houses and investing elsewhere? – NL - Apologize to Monica Sep 9 '14 at 20:46
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    Wait. So you are suggesting that housing prices are going to drop precipitously, so you should buy a house? I think I'm missing something. – JohnFx Sep 9 '14 at 21:55
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    Your answer makes no sense. "I believe housing will crash, so no benefit" is an answer I can understand. But your "Housing will crash so load up" doesn't really make sense, let alone answer the question. – JTP - Apologise to Monica Sep 9 '14 at 23:43
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    He's stating buy outright vs mortgage. The stability is allegedly in the fact that if the mortgage bank goes bad, the bank can't repossess your house. – SrJoven Sep 10 '14 at 12:50

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