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Renting vs. owning

COLORADO ASSOCIATION OF REALTORS

Question: What are the benefits of owning my own home vs. renting?Answer: Owning your own home offers many benefits including the accumulation of home equity, tax advantages, security and the pride that comes from owning your own place. Real estate is considered one of the best investments you can make.

As a fairly general rule, homes appreciate about 5 percent a year. Some years will be more, some less. The figure will vary from neighborhood to neighborhood, and region to region throughout the state. There are no guarantees, and drastic changes in the economy can affect real estate values. Over the long haul, most property appreciates in value.Five percent per year may not seem like that much at first. Stocks, at times, appreciate much more, and today you can earn over 6 percent with the safest investment of all, U.S. Treasury Bonds. However, last year, the 2004 median sales price for a single-family home in Colorado appreciated 10.4 percent compared to 2003.At an appreciation rate of 5 percent annually, a $200,000 home would increase in value $10,000 during the first year. If your down payment on the home was $40,000, your annual “return on investment” would be a whopping 25 percent. The government actually helps subsidize your purchase of a home through tax incentives. All of the interest you pay on your home mortgage in a given year on your primary residence can be deducted from your gross income to reduce your taxable income. Property taxes are deductible, too. Owning your own home can help you manage your financial obligations. When you rent a place to live, you can expect your rent to increase regularly. If you get a fixed rate mortgage (fixed rate meaning that you pay the same amount every month for the life of the loan) when you buy a home, you will know exactly how much your home will cost for up to 30 years. Even if you get an adjustable rate mortgage (where the rate changes every few years), your payment will stay within a certain range for the entire life of the mortgage. Interest rates are not as volatile today as they were in the late 1970s and early 1980s, so the risk of an adjustable rate mortgage is lower.

Owning a home can also be understood as a form of forced savings. You accumulate savings in two ways. Every month, a portion of your payment goes toward the principal. Admittedly, in the early years of the mortgage, this is not much. Over time, however, it accelerates. As you pay down the principal, the equity in your home increases. If you sell the home, you recover that equity after paying off the balance of the loan.Second, your home appreciates in value as we explained earlier. If average appreciation on a home is approximately 5 percent per year, that is equivalent to putting your home’s value into a bank at that rate.When you rent, you are normally limited on how you can improve your rental property. You have to get permission to make certain types of improvements. It doesn’t make sense to spend thousands of your dollars painting or installing carpet, tile or window coverings when the landlord benefits – not you. Since your landlord wants to keep his expenses to a minimum, he or she may not be willing to spend much to improve the place, either.

When you own a home, however, you can do pretty much whatever you want. You get the benefits of any improvements you make, plus you get to live in the environment you have created. You will probably have more space if you own your own home – Both indoors and outdoors. Even when moving to a condominium from an apartment, you are likely to find you have much more room available, your own laundry and storage area and bigger rooms. Apartment complexes are more interested in creating the maximum number of income-producing units than they are in creating space for each of the tenants. This column, brought to you by the COLORADO ASSOCIATION OF REALTORS, is meant as general information. Consult your local Realtor regarding specifics about home buying or selling. Please submit your question to Tyrone Adams, 309 Inverness Way South, Englewood, CO, 80112-5818 or contact tadams@colorealtor.org.


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