Buying a house will be the largest investment most people ever make, say personal financial planning experts at the Pennsylvania Institute of Certified Public Accountants (PICPA). Before you look for a house, analyze whether renting or buying makes the most sense at this point in your life.
Buying a Home
• With a fixed-rate mortgage, you’ll know your principal and interest payment for the life of the loan. Local property tax rates, often paid monthly with your mortgage, may change your payment over time.
• You own the property so you’re building equity and, presumably, a return on your investment if you sell.
• You can deduct your mortgage interest from your tax return.
• You will need to meet a big initial expense in the down payment. Depending on the terms of your loan, you may have to put down as much as 20 percent of the purchase price. That’s a big chunk of change to part with at one time.
• You’ll encounter ongoing monthly expenses, such homeowner’s insurance, utilities, and general maintenance.
• Home ownership comes with a responsibility to maintain your property, and you may need to adhere to requirements from a homeowners’ association, which may also charge monthly fees.
• Title insurance and Pennsylvania realty transfer tax are closing costs that are not tax deductible and can be costly. The title insurance on a $250,000 home, for example, would cost about $1,500. Basic title insurance protects the lender if there is a dispute regarding your property. The Pennsylvania realty transfer tax is four percent. One percent goes to the state and the remaining three percent goes to the city.
• If you ever plan to resell your house, know that it is customary for the seller to pay 100 percent of the realtor commission, generally 6 percent. On a $250,000 sale, this will cost you $15,000. So assuming no market appreciation or depreciation, you may need to own the home for about three years to break even on the subsequent sale.
• When you rent, you’ll likely have to put down a security deposit, but it isn’t a big investment.
• Rent and utilities may increase annually, but other than that you’re pretty much free and clear as far as expenses go. No outlays are necessary for flooded basements or new windows. That’s all up to your landlord to finance.
• When you’re renting, you can pick up and move whenever you like, according to the terms of your lease. If you’ve unintentionally rented in what turns out to be a less than desirable area, you’re not tied down by a 30-year loan or the inability to sell a house. When your lease expires, you can move on.
• Rent is money down the drain. Yes, you’re getting a roof over your head, but you’re not building equity. Your landlord gets that benefit.
• There aren’t any tax write-offs available to renters.
• If you want to paint, remodel, or make any changes at all, you need to clear it with your landlord first. And if you do make changes, you can’t take them with you. The next renter will benefit from any improvements you make.
• You’re at your landlord’s mercy. If he defaults on his loan, you might lose your home.
Once you’ve examined the pros and cons for your situation, there are a few other things to consider before making the final decision to buy or rent. How long do you plan to live in the area? If a job change requiring a move might come your way, now might not be the best time to buy. Selling a home can take time and involves more costs.
If you’re new to a city, take the time to get to know the area. A neighborhood that seems suited to your lifestyle now may not be to your liking in a year or so.
When you sit down and crunch the numbers, does it make more financial sense to buy or rent? There are many free calculators online to help you create and analyze different financial scenarios. You can find some useful tools at www.360financialliteracy.org. Know what you want and what can you afford.
A CPA Can Help
The thought of buying your own home is exciting, but it’s a long-term financial commitment. Understand everything that’s involved in homeownership before you take the plunge. If now isn’t the right time, you can continue to save for a down payment until you’re ready.
Your CPA can help. As a trusted, independent financial advisor, a CPA can understand different options available to you. To find a CPA in Pennsylvania by location or area of expertise, visit www.IneedaCPA.org.
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