Should You Rent Or Own?

It seems like everyone either owns a home or is saving to purchase a home. Certainly there are significant financial and tax reasons for owning a home. While you typically only make a down payment of 10 or 20 percent of the home's cost, you retain all price appreciation on the home. Part of each mortgage payment builds equity in your home. In the beginning, that may only be a small portion of each payment, but significant equity can be accumulated over a period of years. Historically, homes have provided a good hedge against the impact of inflation.

There are also significant tax advantages to home ownership. Mortgage interest
and property taxes can be deducted on your tax return as itemized deductions,
reducing the cost of home ownership. When you sell the home, a significant
amount of capital gains can be excluded from tax. If the home was your primary
residence in at least two of the preceding five years, you can exclude $250,000
of gain if you are a single taxpayer and $500,000 of gain if you are married
filing a joint return.

But despite these advantages, you should still evaluate whether owning a home makes sense for your particular situation. Some factors to consider include:

• How long will you live in the home? Besides the purchase price of the home, you must pay closing costs, which can add substantially to the cost. There are also costs involved when you sell the home, which typically include the real estate agent's commission of five to six percent. Thus, you'll usually need to live in the home for at least five to seven years to make it a worthwhile financial decision. If you plan to move before that, carefully calculate your costs before purchasing.

Several factors need to be evaluated before deciding whether you should rent or own a home. If you'd like to review whether it makes financial sense to own a home, contact your financial adviser.