How Not Buying a Home Could Cost You Big
by Shawn Carvin, Senior Mortgage Banker
While high housing prices here in the Los Angeles area have led many people to put off buying a home, the decision to keep renting instead of buying could end up costing them tens of thousands of dollars. When it comes to financial decisions, a long-term outlook is always best. Here are just a few reasons it is worthwhile to make the short-term lifestyle sacrifices that are sometimes necessary in order to buy a home.
Tax benefits of buying a home
Homeowners, particularly those with mortgages, are eligible for many tax deductions that are not afforded to non-homeowners. These deductions can add up to thousands of dollars of savings annually. For more details, read Tax Benefits of Purchasing a Home with a Mortgage.
In Southern California, and especially Los Angeles, the real estate market is cyclical, with long stretches of significant growth, inevitably punctuated by a cooling off periods or even some retraction. So it’s important to look at the big picture over time. The Case-Shiller Index is an excellent tool for the Los Angeles and Orange County markets. Looking at the 20 years between September 1995 and August 2015, the index has increased 235.81%!
Rising cost of renting
According to reports for L.A. on Trulia, even with higher real estate prices, buying is often cheaper than renting. In 2015 when interest rates became slightly higher, it was still 37.2% less expensive to buy than rent. In 2016, the percentage has increased to 37.7%. Based on a typical home purchase price of $540,000 and a 20% down payment, the $2600 monthly mortgage payment is equivalent to an average 2 bedroom rental. But the home buyer experiences net savings when other benefits, such as tax deductions, are factored in. Unless home prices significantly increase or mortgage rates climb into the 7% range – both of which are unlikely – buying will continue to be less expensive than renting for the foreseeable future. Plus, buying allows homeowners to lock in a predictable monthly housing cost, instead of facing the risk of increased rent costs year after year.
There are several ways a home provides retirement benefits. First, if the mortgage is paid off before retirement, the cost of living is greatly decreased. This can help assure that retirees’ lifestyles don’t have to drastically change. Whether or not the mortgage has not been paid off, the home can be sold and the equity used to fund housing and other costs of retirement.
Another way homeownership can be leveraged for retirement benefits is the reverse mortgage. The home is used as collateral for the loan, and monthly payments are made by the lender to the homeowner. The balance of the loan grows over time, but no repayment is required until the death of the last living homeowner.