Mortgage ABC

Why Owning Is Better Than Renting?

I pocketed $100,000 from owning a mid-class house for two years, but I'm currently renting now. While I agree with most of the assessment in this Fool's feature (which was published 6 months ago), today's changing interest rate landscape should tilt the decision toward renting for sure.

Ask an average American whether it's better to own or rent your home, and you'll likely hear that owning is better. You get to build equity in an asset that's likely to appreciate in value over the long haul, and you can enjoy mortgage interest tax deductions as well. Some savvy sorts will point out, though, that renting sometimes is better -- such as when you're not going to stay in the same place too long, or if you're saving (and investing) money by renting and are earning good returns.

David Bach, author of The Automatic Millionaire Homeowner, recently weighed in with some more advantages of owning.

For starters, he explains that it's cheaper to buy: "Assume you're renting a house for $1,500 a month. Now let's say you stay put for 30 years, during which the landlord increases the rent by 5% a year. Over those 30 years, you will hand over a total of nearly $1.2 million in rent payments -- and at the end, you'll have nothing to show for it except a bunch of cancelled checks. To add insult to injury, you'll now be paying $6,174 a month in rent!" That certainly does sound inferior to what could be a fixed mortgage payment for 30 years, with an appreciated, owned home as the end result. (If a $200,000 home appreciates at 5% per year, on average, it will end up worth about $865,000.)

Bach goes on to explain that mortgage interest deductions "can effectively reduce your monthly mortgage payment by 30% or more." I'll interject here that this benefit decreases over time. While much of your mortgage payment in your first years goes to interest, that percentage decreases as the mortgage ages. And actually, unless your payments are going completely to interest, a portion of them will pay down principal and not apply to this 30% savings. So ... if you're in the 28% bracket, you can save 28% only on the portion of your payment that's for interest -- which could make it anywhere from 0 to 28%.

Then there's the tax-free gain. While most of your stock market gains will likely be subjected to taxes, you can, as long as you follow the rules, walk away from the sale of your home with a gain of up to $250,000 -- tax-free! If you're married, make that $500,000! Our tax expert, Roy Lewis, has offered more details on this great benefit. Before I wrap this up, I'll mention another advantage of homeowning -- access to home equity loans.