It’s a big question. Many factors must be taken into consideration in making this decision. It is impossible to deal with all of them because each case is different, and because some factors are so deeply personal. And it is also true that many do not have the option. This is for those who do. The myriad of potentially contributing factors aside, a few are common to all and it is just one factor that we address today: the cost difference. Again, many things influence this factor, not the least of which is the expectation of future value of the home being considered. In other words, how much will the home appreciate, or will it appreciate? Of course it is impossible to accurately determine this figure. Home values go up and down – mostly up – the recent decline in values nationwide notwithstanding. For purposes of this discussion, we remain neutral. Therefore, our figures contain neither a gain nor a decline in value.
It is easy enough to plug in an annual appreciation figure if that is your belief. One last comment before going further: the figures given are illustrative only and are not to be taken as tax advice. Individuals should consult their own CPA or attorney for an accurate analysis.
Consider a couple in the combined state and federal tax bracket of 45%, paying $3,000 per month in rent. Assume they are contemplating buying a home with a purchase price of $900,000 with 20% downpayment, and a loan of $720,000 at 5%.
Without factoring in any potential future rent increases, property value increase, costs for maintaining the home, or loss of potential income from the down payment, let’s make some simple calculations. Monthly payments for the loan are $3,866.
Taxes run $935 per month and insurance is $150. So the total monthly PITI is $4,951.
Obviously this is a before-tax difference of $1,951 per month. So -- it costs more to buy the house? But wait. Don’t forget about income tax deductions. Included in the monthly $4,951 PITI is $3,935 for interest and property tax. These are deductible. The only non-deductible part of PITI is insurance at $150 per month.
Using a 45% combined rate, the couple saves $1,770 per month in income taxes. So their effective monthly house payment drops to $3,180. Compare that to $3,000 in rent. Again, we caution you that these figures are illustrative only. Your CPA will undoubtedly come up with something different. If he/she doesn’t, you’re paying too much for their tax advice. But to continue: if you believe the home will appreciate at, say, 3% per year, that’s $27,000 or $2,250 per month, the advantages of
buying a home increase significantly.
Another thing to think about is the immediate “payment shock” going from $3,000 per
month to $4,951. That’s a big jump, but it might be mitigated by adjusting your monthly withholding to equal (as closely as possible) your tax savings. This gives you money in hand to make the higher monthly payments, which is more beneficial than getting a tax refund each year by virtue of the deductions you achieve through home ownership. Also, remember that each month you pay only the principal and interest on the loan ($3,866). You will pay your insurance premium once a year and you will pay 50% $5,625)of the annual property tax each December and April.
Any competent mortgage consultant will have a simple spread sheet which calculates “Rent or Buy”. They will input your figures to give you a basis for your own decision. But – you should always confirm with your own tax advisor.
This was published by Debra Stedt of Guaranteed Mortgage. Please contact me for further information.
