Apart from a roof over your head, what are two of the best reasons for buying your own home? If you said inflation and taxes (maybe you said something else, but let's pretend you said inflation and taxes so we can make our point), you might want to find some other reasons.
In the late 1970s, sinking all your money into a home with the idea of making a big gain a few years later made lots of sense when inflation was running in the mid-teens. If the homeowners could squeeze through a few years of high payments, they could sell the house and move into a nicer one, with a huge down payment to ease the strain. Or they could wait for their income to go up and pay off the low-interest loan with the ''cheaper'' dollars that resulted from the loan rate being lower than inflation.
Today, however, one of the new realities of a relatively noninflationary economy is that the mortgage burden won't get lighter thanks to inflation. And changes in tax laws have also altered the calculation that goes into the decision.
So people facing a choice of whether to rent or buy might want to look into these questions more carefully to see if buying really is the most logical choice.
With a 3.4 percent inflation rate last year, the time for renters may have returned. In many parts of the country, rents are considered something of a bargain, although increases could come in the future. In the meantime, this is a good time for putting money in savings, with real returns (above the inflation rate) running 5 percent or more.
Thus, it may be worthwhile to take advantage of low inflation and high interest rates to rent, saving the money you would be spending on high mortgage payments, maintenance, insurance, property taxes, and perhaps commuting expenses. Then, when you are ready to buy a home, you are more likely to have enough saved up to afford a large down payment that will reduce the monthly mortgage expenses.
Another way inflation changes the home-buying equation is the time spent in the home. In 1970s, it was possible to make a handsome profit in a year or two and move on. Today, however, unless you are planning to stay in the home four to five years, it will be harder to regain enough from appreciation to cover your initial costs and provide adequate equity for the next home.
Finally, a lot of attention has been paid in recent years to the uncertainties of adjustable-rate mortgages. But there are plenty of other ''adjustable'' or unpredictable costs potential homeowners need to be aware of. These include utilities, property taxes, insurance, maintenance, municipal services like sewer and sidewalk repair, and landscaping.
Listing these variable expenses is not meant to prevent people from enjoying the satisfaction and possible financial rewards of home ownership; but you should try to put together a complete list of these expenses before buying, to avoid unpleasant surprises later.
As for taxes, since marginal tax brackets have been lowered in recent years, even people who do not itemize - like renters - are paying less taxes. Also, the standard deduction (now known as the zero bracket amount) has been raised to $3, 400 for married couples and $2,300 for single people.
So the higher your tax bracket and the more expenses you can itemize, the more you will gain from buying your home. Otherwise, many of the nonhousing deductions are covered by the zero bracket amount.
Once itemizing does begin to make sense for you, though, it opens up a whole world of tax breaks and a way of thinking about how you spend and save your money. If you can sensibly itemize, you can begin keeping closer track of charitable donations, the miles you drive to take the Scout troop hither and yon , and perhaps sales taxes if you buy a lot of big-ticket items in one year.
On your honor
People who want to make individual retirement account (IRA) contributions have been put on their honor by the Internal Revenue Service. In a recent letter to Commerce Clearing House, the IRS stated that taxpayers could claim deductions for IRA contributions even though those contributions were not yet made at the time the return was filed. As long as the money is put in the IRA before the tax-filing deadline, the IRS said, it can be claimed on a return filed earlier.
So if you have some money coming to you in the next few weeks, it is possible to send in your return now and fund the IRA later, as long as it is done by April 16, if no filing extension has been requested. If you somehow miss the planned contribution, be sure to file an amended return eliminating the deduction, or the IRS will hold you liable for negligence and fraud penalties.