The ability to build equity in a home, combined with tax advantages offered by both federal and state governments, has driven homeownership to record levels. Many American households have chosen homeownership over renting for these, as well as other reasons.

Buying a home is not as complicated as it may seem. As with any large investment, it is important to thoroughly understand the purchasing process and the obligations associated with taking out a mortgage. Over the years, many mortgage lenders have made the homebuying process simpler and easier to manage for potential homebuyers, especially for first-time buyers.

One of the key steps in determining whether you should become a homeowner instead of a home renter is understanding how the amount you dedicate each month to paying for housing may change depending on whether you rent or buy. In addition, you should understand how payments you make on a mortgage loan differ from rental payments by offering you the opportunity to potentially build equity, that is, the value of your home that exceeds the amount of your mortgage loan. More information about home equity and what it represents may be found in the section entitled "Home Buying Process - How it Works."

For example, let's look at a renter with a monthly rent payment of $600. Over five years, that person will have spent $36,000 on rent. In 10 years, that number rises to $72,000. As a renter does not receive any ownership interest in the property he or she rents, the $72,000 represents the cost of simply living in the property. At the end of the rental period, the renter receives nothing in return for that $72,000.

Now, if this same amount were applied to paying an amortizing mortgage loan, a portion of each month's payment would typically go toward paying down the principal (the amount of your loan, usually representing the price at which you purchased the home less any down payment you made). Paying down the principal balance of your loan allows you to build ownership in the property. Assuming that the value of your house does not change, every month that you make a payment, you are paying down the amount you owe, meaning you own a little bit more of the home, each month, until ultimately, you own 100 percent of the home (when the loan is paid off). This means that when you sell your home the difference between the amount you receive from the sale of your house and the amount required to pay off your mortgage loan is your equity. In addition, the interest that you pay each month, as well as any property taxes, may be deductible on your federal income taxes - a tax advantage not available to renters (check with a local tax advisor or the Internal Revenue Service).

On the flip side, purchasing a home involves expenses that renting does not. For example, you must pay interest on your mortgage loan, which means that over time your home will cost more than the amount you paid at the time of purchase. In addition, homeowners must pay property taxes and are required to obtain insurance on their property. Renters are not required to pay property taxes or obtain insurance on the building in which they live. Furthermore, renters are not usually required to maintain the property or make repairs when something goes wrong; homeowners on the other hand are responsible for all upkeep and repairs to their property. In addition, probably the most important advantage of renting is the flexibility it offers in terms of moving. If you have purchased a home, and home prices drop or stagnate, it may be difficult and costly to sell the home at the price you need. In some instances, your house may be worth less than what you paid or the amount of money you owe on your mortgage loan. Renters typically do not encounter issues such as this.

Determining whether you can afford to make the switch from monthly rental payments to monthly mortgage payments is critical to determining whether you should purchase a house and involves more than simply comparing the amount of your monthly rent with the monthly payments on a mortgage loan. As discussed in the next section, homeownership involves expenses not associated with renting that must be considered when deciding whether to purchase a home.