Owning Versus Renting
While the question of “should I buy or rent?” may have had a different answer even a few years ago, declining property values have made the current real estate market a boon for home buyers, more specifically, first time home buyers.
In this article we will explore how you as a consumer can determine if the purchase of a home is right for you, from a financial perspective.
Benefits of Home Ownership
There are several benefits to home ownership, and they include:
Tax benefits: Talk to your tax professional about this for more information, but it is likely that you are able to deduct both your property taxes and mortgage interest from your taxable income each year. While this may seem insignificant, it can add up over time. We’ll cover this later in an example.
Property appreciation: While many areas are flat as far as growth right now, eventually, prices will start to increase. If you own, versus rent, you will be able to realize this appreciation.
A place to call home: Many things that you can do, such as changing color schemes, or adding a deck to the back of the house. When you own your home, you will have far more flexibility.
Running the numbers
Sitting down and looking at the numbers to determine if purchasing is a better value to you is a good idea. Here’s an example.
Let’s say that you currently spend, or have an opportunity to spend $1,200 per month renting a property. This means that you would also have that same $1,200 to spend on buying a home of your own.
Using a hypothetical mortgage rate of 4.5% on a 30 year loan, after putting 3.5% down, using FHA, we can do some calculations.
If your purchase price were to be $180,000, your loan amount, including the upfront mortgage insurance would be $176,850. The monthly payment for just the mortgage would be $896.07. Assuming a property tax rate of approximately $200 per month, which we’ll add to the payment.
The two final things that need to be added are the monthly mortgage insurance at $176.85 per month and $60 per month for property insurance.
Your total mortgage payment would be $1,332.92.
Remember though that you may be able to write off some of this on your income taxes. Let’s explore this now.
During the first year of your mortgage, you will have paid $7900 in interest. Adding to this the $2,400 in property taxes, you could potentially have $10,300 worth of deductions on your taxes.
If you were to be in the 15% tax bracket, $10,300 * 15% would net you a savings of $1,744 for that year, or $145 per month.
Now consider subtracting this from the original $1,332.92, your first year payments would net out to $1,187.92.
Wow, that’s less than renting!
As the interest expense on the mortgage decreases, so will the write offs, but keep in mind that rental rates will increase over time as well.
With the exception of taxes and property insurance, your mortgage payment will be fixed for the next 30 years. The mortgage insurance will eventually decrease to zero as well.
It may seem like a home for $180,000 is unrealistic, however many communities around New England are well within that price range. If you need help finding a home, let us know, we can help you find a great Realtor to work with as well!