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Should I Rent or Buy a new Home?

To Rent or Buy? That is the question. Trulia.com shows us, with some neat graphics, that the answer depends on where you live. If you're in Phoenix of Jacksonville: Buy, Buy, Buy. But not so fast in New York City or Boston.

No matter where you live, one of the most expensive parts of a divorce is changing your lifestyle from supporting one household on your current incomes to supporting two households. Whether or not the current home is sold or one person stays there, in the end both parties are faced with the question: is it better to buy or rent?

Traditional thinking is that it is better to buy. It is the American Dream to own your own home, and the government assists you by offering a mortgage interest deduction on your income taxes. But as Trulia.com's graphics demonstrate, that may not be enough in todays market.

Let's use Natick, Massachusetts to test an example:

The average rent for a 2BR home or apartment in Natick in 2010 was $1400. The cost of living in such a home for two years would be $33,600 not counting tenant's insurance. Let's estimate tenant's insurance at approximately $150 per year which results in the total two-year cost of renting as $33,900.

The average home price for a 2BR home in Natick in 2010 was $286,000. If you buy a home today at $286,000 and put down 10% ($28,600) you would need a mortgage of $228,800. At current rates (4.468%) and for a 30 year fixed mortgage just the mortgage payment would be $1,039 per month. The property taxes on that home would be approximately $3,603.60 per year, and homeowner's insurance would be approximately $1000 per year. Adding the cost of the mortgage, homeowner's insurance and taxes together the monthly cost of buying the home is $1,422.63 per month, which results in the total two-year cost of buying as $34,143.

For a 2BR in Natick, the figures for renting and buying are pretty close and if we take into account the mortgage interest income tax deduction for buying, buying would seem to be the way to go (if you have an effective tax rate of 15% then you could save approximately $1,370 in taxes in the first year). In this example by buying a home instead of renting you'll save approximately $2,500 over the first two years.

But wait, there's a catch!

Remember that $28,600 you tied up in the equity in your home as a down payment? Risking that down payment on the housing market, is ultimately the cost that you paid for saving $2,500 over two years. And the reason that traditional thinking says that it is better to buy is because traditionally the value of real estate over time goes up.

To keep using Natick as an example, the value of the average 2BR from 2001 to 2011 went from $226,000 to $280,400. So if you bought a home in 2001, it looks like you made a good investment. But what if you bought in 2005. The average 2BR in Natick was $333,000 in 2005. If you only put 10% down and bought in 2005 you are now well underwater on your mortgage. And according to Boston.com the trend is continuing: Sinking prices put more homeowners underwater.

Essentially, this means that you must ask yourself How long do you want to stay in your new home? If you may want to move in 2 years, you will have saved slightly on your monthly cost by buying (due to the tax benefits), but if your house is worth less you may have lost your down payment. And this is assuming you can even sell your home as quickly as you want. Renting offers mobility without having to wait for a buyer to come along, and without risking your liquidity.

Of course, if the housing market turns around or you plan on staying in your new home for a much longer time then you may still benefit from buying. Essentially you are guessing whether today is more like 2001 or 2005? Well... do you feel lucky?

To compare these figures for your town or city, check out Zillow.com for home price averages and mortgage rates, and ApartmentRatings.com for rental market trends.

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