Home may or may not be where your heart is, but it is definitely where a big chunk of your money is tied up. So the economics of your living arrangements need regular checkups, just like the furnace and the roof.
This is true whether you rent, own and are considering moving, or own and have no plans to move.
*To buy or not to buy. This question has become considerably more difficult with the advent of high mortgage interest rates and the decline in inflation.
For a number of years during the 1970s, the cost of mortgage money was actually negative -- below the inflation rate -- and soaring inflation and appreciation made buying a home an obvious and remunerative thing to do. But some recent studies suggest that the decision today should not be automatic.
The same house here and in many other markets can be rented for a far smaller monthly payment than would be required to buy it. And the mortgage interest deduction may not be enough to offset this, particularly for taxpayers below the top brackets.
Thus, if there is to be a payoff from ownership, most or all of it must come from appreciation, and that takes time. A 1983 study by Alan R. Cerf of the University of California at Berkeley found that on a present-value basis the owner of a $120,000 house would be only 14.6 percent better off than a renter after 10 years, including equity.
And the Questor Strategic Real Estate Letter concluded this month that "since 1979 many individuals would be better off had they chosen to invest in apartment syndications and rent rather than own the residence in which they live."
*Considerations in buying. Once a would-be homeowner's main problem was which house. Now an equally important question is which mortgage. The first decision is to be made is between a fixed-rate loan and an adjustable one. ARMs are very popular these days because they carry lower initial rates, but former Council of Economic Affairs chairman Martin Feldstein last week observed that if he could find a fixed-rate loan with no pre-payment penalty, he would prefer that.
Feldstein reasoned that if rates go up, an adjustable would get more expensive, while if they go down he could refinance. He called a fixed-rate loan with a prepayment option "a peculiar kind of one-sided gamble for homebuyers. If interest rates go down, well, they lose for a couple of years before they refinance. If interest rates go up, they benefit permanently. Why not take that kind of option? . . . You're protected one way and you don't lose anything the other way." he said.
But there are other considerations. First, some buyers may not have enough income to qualify for the higher initial rate on the fixed loan. For them it may be a choice of taking the ARM or not buying the house.
And second, the low initial rates when coupled with annual interest rate caps can cause an ARM to be much cheaper in the early years, and that is an appealing feature for a buyer who figures to be selling in a few years.
Buyers considering an ARM should be prepared to shop around, looking for not only the best rates but such consumer protection features as annual and lifetime interest rate caps. Also, borrowers should be sure they understand not only what index their ARM is tied to, but also what the lender's margin is over that index.
*Considerations in selling. Homeowners willing to hold a below-market note from the buyer in order to get a higher price should consider going ahead promptly with their sales. Congress last summer changed the law so that the IRS can "impute" a market interest rate to such a transaction and tax the seller accordingly, even though the seller is not actually receiving the cash. But Congress put off the effective date on smaller sales from Jan. 1 until July 1.