The Housing Decision − Rent, Lease or Buy?
Ah, the American dream – to own your own home. The equity in a home can be a valuable asset, especially in retirement. But home ownership may not be right for everyone.
How do you decide whether to rent or buy? Here are some factors to consider.
Home ownership
On the plus side of home ownership
- Along with a mortgage comes a tax break since property taxes and interest may be deductible
- If you're one of the lucky ones living in a booming area, you could make a healthy profit from the sale of your home in the future
- Pride of ownership is no small thing – having the opportunity to decorate the way you want or make the yard the best on the street is priceless to many homeowners
- Owning a home expands your options for living arrangements, for example if you need financial or physical help you could offer a room to someone who would pay rent or run errands in exchange for a place to live
. . . and the negatives
- Property taxes can add significantly to the monthly cost of owning a home
- Keeping up with a home and yard takes time and money
- Realtors say it’s reasonable to assume it will take 90-120 days to sell a home (If the housing market is cold it could take much longer)
- There’s always the chance you could take a loss by not having enough equity when you sell
Renting
On the plus side of renting
- If you are likely to move frequently, you aren’t burdened with selling a house
- It's cheaper up front to rent that buy since a rental deposit is usually much less than a down payment and closing costs on a house
- You may enjoy shared amenities, such as a pool and fitness center
- Renting means no property taxes
. . . and the negatives
- Some people view renting as throwing money away because you don’t build equity
- If the owner decides to sell, you may have to move before you're ready
- Unlike a fixed mortgage rate, rent increases could outpace inflation
- You may not be allowed to paint or change the property to suit your needs or taste
What’s right for you?
There you have it, a quick look at the good and bad of owning a home and renting. Chances are you've thought of a few plusses and minuses of your own, too. As you sit down to think it through, keep the following points in mind.
Making it yours – If you buy a new house, you'll probably spend a good amount of money making it yours. If you buy a used home, you may be in for repairs and other expenses of getting the home the way you want it. Make sure you budget for such things when looking at buying.
Financing – If you decide to buy, you'll probably have to pay private mortgage insurance (PMI) unless you put 20% down. A high down payment may also qualify you for a lower interest rate.
Tapping investments – It may be tempting to dip into long-term investments in order to buy a house. Carefully weigh this decision.
Borrowing or withdrawing from your 401(k) is an option that you'll want to consider carefully. If you borrow, you won’t pay taxes or penalties, but you’re borrowing pre-tax dollars and paying off the loan out of your regular income with after-tax dollars. When you draw from your 401(k), you’re paying taxes twice on that money. Withdrawing from your 401(k) under age 59½ means you’d owe taxes plus a 10% penalty.
You have to repay the loan within the time specified by your plan or the money you borrowed is considered a taxable distribution and all tax penalties apply.
As you consider taking money from your retirement account, keep in mind that you may miss out on growth. Sure, you’re repaying the loan over time and paying yourself interest, but the entire amount could be working for you and compounding if left in your 401(k).
If you withdraw from a traditional IRA to buy your first house, the government will help a bit by not assessing the 10% early withdrawal penalty since you’re a first-time home buyer. You can withdraw up to $10,000 as a lifetime credit penalty-free, though you still have to pay taxes.Next steps
Not sure which path to take? Talk with your investment professional about the role home equity can in your future.
Neither Nationwide® nor any of its representatives give legal or tax advice. Contact your legal or tax advisor for such guidance.
