Your next home: Should you buy or rent?

You've seen for sale signs on houses around town, and they've got you thinking. Maybe now is the time to declare independence from your landlord and buy your own home. Buying a house will be the largest investment you're ever likely to make. Before you look for a house, the Minnesota Society of CPAs recommends that you first analyze whether renting or buying makes the most sense for you.

The pros and cons

• Buying a home - pros

With a fixed-rate mortgage, you'll know your principal and interest payment for the life of the loan (though if you escrow local property taxes or homeowner's insurance, fluctuations in these rates may change your monthly payment over time).

You own the property so you're building equity, and presumably, a return on your investment if you sell.

You can deduct your mortgage interest from your tax return.

• Buying a home - cons

The biggest initial expense of home ownership is the down payment. Depending on the terms of your loan, you may have to put down as much as 20 percent of the purchase price. That's a big chunk of change to part with at one time.

You'll encounter ongoing monthly expenses such homeowner's insurance, utilities and general maintenance.

Home ownership also comes with a responsibility to maintain your property, and you may need to adhere to requirements from a homeowner's association, which may also charge monthly fees.

• Renting - pros

When you rent, you'll likely have to put down a security deposit, but there isn't a big initial investment.

Rent and utilities may increase annually, but other than that you're pretty much free and clear as far as expenses go. No financial outlays are necessary for flooded basements or new windows. That's all up to your landlord.

When you're renting, you can pick up and move when you like, subject to the terms of your lease. If you've rented in what turns out to be a less-than-desirable area, you're not tied down by a 30-year loan or the inability to sell the house. When your lease expires, you can move on.

• Renting - cons

Rent is pretty much money down the drain. Yes, you're getting a roof over your head, but you're not building equity. Your landlord gets that benefit.

At a federal level, there are no tax deductions available to renters. However, Minnesota, unlike many states, offers a rent-paid tax credit for renters who meet income-level requirements.

If you want to paint or remodel or make any changes at all, you need to clear it with your landlord first. And if you do make changes, you can't take them with you. The next renter, not you, will get to enjoy any improvements you make.

You're basically at your landlord's mercy. If he defaults on his loan, you might lose your home.

• Other considerations

Once you've examined the pros and cons for your situation, there are a few other things to consider before making the final decision to buy or rent. How long do you plan to live in the area? If a job change requiring a move may come your way, now might not be the best time to buy. Selling a home can take time and involve more costs than you've bargained for.

If you're new to a city, take the time to get to know the area. A neighborhood that seems suited to your lifestyle now may not be to your liking in a year or so.

When you sit down and crunch the numbers, does it make more financial sense to buy or rent? There are many free calculators online to help you create and analyze different financial scenarios. Ask yourself: "What do I want and what can I afford?"

The thought of buying your own home is exciting, but it's a long-term financial commitment. The MNCPA advises to be sure you understand all the responsibilities involved in homeownership before you take the plunge. If now isn't the right time, you can continue to save for a down payment until you're ready. Your CPA can help. As a trusted, independent financial advisor, a CPA can help you understand the different options available to you. Don't have a CPA? Visit www.mncpa.org/referral to locate one in your area.

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