Buying vs Renting

rent_vs_buyIs buying a house the right thing to do at this stage in your life? Many people have the perception that home ownership is much more expensive than renting. What you may not realize is that for the price of renting, you can probably own your own home. It may not be the Castle of Versailles, but it will be a home you can call your own. A home that can build equity and a secure future. In most cases, your home will be your single biggest asset with tax advantages that you couldn’t take advantage of while renting.For instance, if you own a house, the government allows you to deduct mortgage interest and real estate taxes from your gross income amount through a “Schedule A” tax form. This means you will pay less tax to Uncle Sam if you own a home. Recent tax laws also state that first-time home buyers can use money from an IRA (Individual Retirement Account) for the down payment on their new home.   Let’s look at an example that will compare the tax benefits you would receive from owning a house rather than renting.
SEE EXAMPLE: A married couple has a combined gross income of $85,000 per year. They have some money in a savings account and an IRA totaling $35,000. The couple cannot decide whether they want to purchase a home or stay in their current apartment. Their current rent is pretty cheap at $900 a month. They know that owning a house costs more than that.  But does it?
The couple is looking at a house that is priced at $150,000. Because of the new tax laws that allow you to utilize money from an IRA, the couple have enough to cover a twenty percent down payment which would eliminate having to pay PMI (Private Mortgage Insurance).  After the down payment, the mortgage loan amount comes  to $120,000.  On a mortgage of $120,000, the couple’s monthly mortgage payment is $1100 (principal + interest).  Because the interest is always higher at the start of a mortgage, the split of the $1100 comes to approximately $1000 in interest and $100 to  principal.  Using the “Schedule A” tax form, the $1000 a month in interest will be tax deductible. The property taxes equal $2,900 a year, and you can deduct those costs from your taxes as well.

Renting Scenario Buying Scenario
Gross Income $85000 Gross Income $85000
Current Rent $900 Mortgage Payment $1100
Total Paid Per Year $10,800 Total Paid Per Year $13,200

Here’s where the accounting comes in. The renting scenario uses your basic tax form where the buying scenario using a “Schedule A” Form. Let’s play the example out factoring in the tax advantages.

Renting Scenario Buying Scenario
Gross Income $85,000 $85,000
Yearly Mortgage Interest $0 $12,000
Property Taxes $0 $2,900
Deductible Withholding Taxes $0 $4,500
Taxable Income $85,000 $62800
Taxable Income After Other Standard Deductions $73,100 $58300
Income Tax Paid $13430 $9900

If you divide the $3530 of tax savings into twelve months, you determine a tax savings of approximately $294 per month. Subtract the $294 from the $1100 mortgage payment and you get an adjusted total of $806.

While the $900 per month in rent originally appeared to cost less than the $1100 per month mortgage payment, factoring in the $3530 of tax savings shows that building equity by owning your own home can actually cost less per month than renting a apartment that you will never own.

For more details on the financial advantages of home ownership, contact one our NextHome Unlimited Realty Solutions agents who will be happy to counsel you and help you navigate the homebuying process with as little stress as possible.  At NextHome Unlimited Realty Solutions, your satisfaction is our most valued asset.  #HumansOverHouses!