Housing costs have soared over the years. And, while owning your own home may still represent the American dream, many people are unsure at what point it becomes less expensive to buy than rent. There are four key elements in making that decision: 1) the cost of the home; 2) the amount of the down payment and other out-of-pocket expenses required; 3) the interest rate on the mortgage; and 4) your income tax bracket.
The following list will help you calculate the costs:
- Write down the purchase price and financing terms for the house or condominium. Include the down payment, closing costs, and any points.
- Estimate your gross monthly costs as a homeowner, including utilities, maintenance, and repairs.
- Calculate your net monthly outlay. This is computed by taking into consideration any tax savings received by deducting mortgage interest and property taxes.
- Project what the proceeds would be after selling the property in five, ten, or twenty years.
- Calculate your total rent for the same period.
- Compare the two sets of figures.
While the above method offers a rough comparison, you also need to determine the other nonfinancial advantages that ownership may provide. But remember, you must also consider personal preference and which option will provide you with more happiness or security.
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