SHOULD YOU BUY A HOME . . . OR CONTINUE TO RENT?
Many renters hesitate to purchase a home because they
mistakenly believe that the new mortgage payments (including taxes and
homeowner’s insurance) will greatly exceed their current rent payments. And, when we compare say an estimated house
payment of $1,700 with a typical rent of only $1,300, it initially “appears” that there is a “big
difference”, suggesting that it is more economical to rent.
It is important, however, to always examine the “after
tax” consequences of what can at first seem like a very high monthly
payment. The tax laws “reward”
homeowners with significant tax deductions.
It is not uncommon, then, to find that these tax deductions result in
“effective” house payments that are lower than typical rent payments.
A homeowner is able to deduct the interest portion of
their monthly house payment as well as the annual homeowner taxes assessed
against the property. Both the interest and the tax amount are deducted based
on the taxpayer’s tax bracket. The higher the consumer’s tax bracket the
greater the projected savings.
It is important to remember that these “savings”,
while not money in your pocket, are “diverted” from taxes being owed to being
used to help pay the monthly house payment.
A new home buyer should make certain that they fully understand this
concept. It remains one of the major
advantages when purchasing a home. This tax deduction represents one of the few
“tax shelters” still existing for middle income consumers, having been retained
as a benefit in the 2018 tax cut legislation passed by Congress.
While each transaction will differ based upon the
borrower’s individual financial profile it is not unusual to discover that
owning a home is often economically advantageous. Just the tax shelter aspects
alone as indicated above, can often be sufficient to encourage most persons to
buy a home rather than to continue to rent.
But, the “buy” scenario improves more when calculating
even the most minor amount of “equity return”. This is achieved when with each
mortgage payment, the interest portion declines while the principal amount
owned by the borrower increases. Remember, the amount of equity return will
increase each year, making each continuing year of home ownership a better and
better deal for the owner.
Finally, calculating even a minimal
level of home appreciation results in a very low “effective” monthly expense. Any increased
appreciation would result in a greater return on one’s home investment.
The tax benefits of home ownership will vary depending
upon each individual’s specific circumstances. Thus, every prospective home
buyer is encouraged to become “pre-approved” for a loan during which the above
home ownership benefits can be personally calculated and discussed. With
historically low home mortgage interest rates coupled with affordable home values,
this may be an excellent time to explore if this is the time for you to quit
renting and to buy a home.