Why Buying a Home is Better than Renting

Most people don’t realize the hidden costs of homeownership, nor do they even consider the hidden potential. Owning your own home can become quit expensive. There are hidden costs that you don’t think about when you are signing papers at your closing. These hidden costs can become intense, but your new home is an investment, if you realize it or not. In the example below we will look at a house that was bought in 2001 for $150,000 in the Austin, Texas area. Today the house is accessed by the state for around $169,000. The market value for this house is around $241,000.

These first two costs we are going to discuss are of taxes and insurance. No matter where you live you can expect to pay these two costs. These are inevitable and just come along with homeownership.

  1. Taxes – Each year you are required by the state you live in to pay property taxes. The more expensive your home, the greater the property taxes. In the example from above, these homeowners pay about 2.1% of the accessed value of the home in taxes each year. This may seem like a lot of money, but being a homeowner has its advantages. You receive an income tax break each year for owning a home. The tax break is usually around the same amount that you pay in during the beginning of the loan as most of your payment goes towards interest. Thus, you get to offset your income by the amount of interest you pay on your mortgage. In our example, the total taxes paid for 2007 is about $3,500. Claiming a Homestead Exemption is also a nice benefit you can claim as long as you intend to live in the house you are buying.
  2. Insurance – Insurance protects your property. Your bank or mortgage company may advise certain premiums that they feel you need to safeguard your investment. There is a replacement value set on each home stating what the insurance company thinks the house would be worth if they had to replace it. For the house above, the replacement value is about $210,000. The homeowners of this house pay about .7% of the replacement value in insurance premiums each year. Today, the total insurance premiums paid for 2007 is about $1,400.Now let’s talk about other possible costs associated with owning a home. These are the hidden cost mentioned above required for home upkeep. Homeowners can usually assume to pay about 1% of the purchase price for improvements each year. This is about $1,500 a year for the Austin, Texas home. Here is a list of where the main chunk of your money will be going.
  3. Utilities – You can expect to now have to pay for utilities such as gas, water, electric, cable, and maybe even a land line.
  4. Appliances – For the most part, homes usually come with a stove, microwave dish washer, but you may have to purchase a refrigerator and a washer and dryer. Don’t forget that these things do break down and it is your responsibility to replace them.
  5. Repairs – This is the main upkeep of your home. Repairs are what keep your house afloat. There are usually cosmetic things, but if you don’t keep up with them, like a roof for example, you can then have major problems. A leaky roof can ruin your entire house.
  6. Landscaping – This is a key element to this puzzle. Curb appeal is what brings a potential buyer into your home to take a further look. This is something you are constantly taking care of. Matured plants are always a plus.
  7. Pest Control – This expense is something your house may not need, but before purchasing your home, you need to make sure to get a termite inspection.

Now let’s take a closer look at your new investment. On average you can assume that your home value will increase about 5% per year. For the Austin, Texas home, it has increased about 7% each year. The graph below depicts the profit of the example home over a seven year period. This can be higher or lower depending on your home, the area in which your home is located, and the upgrades you have done due to the hidden potential. As you can see, there is a substantial profit over just seven years. If you consider the taxes to be a wash due-in-part to an income tax break, the profit is even greater.

costs associated with renting vs. buying a home

As you can see, owning your own home can be a great investment.  In the example I described above, the owner of this home has a cash flow benefit of approximately $84K over renting during the 7 year period we analyzed.  Now you are able to see why the hidden costs of homeownership can obviously mean potential. 

Rachel McGuire
LoneStar Financing

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