Should You Buy or Rent
Should You Buy or
no point wasting time and energy house-hunting before you know
what you can afford. So your next step is to assess your finances:
Compare Buying with Renting
Find out about interest rates
Understand your closing costs
Figure out your income, debt and
Calculate how much home you can
If, like most first-time buyers, you are
presently renting, it's easy to calculate your cost - simply, the monthly rent
you pay. (Utilities, phone, cable, and other costs can be ignored in this
comparison because they'll be approximately the same whether you rent or buy.)
But calculating the cost of homeownership is much more
complicated, because income tax considerations affect your bottom line. And
there is, in addition, the uncertainty about how much the value of your home
will rise (or even fall) in the coming years.
As a tenant, you may be taking a standard deduction on your
income tax return. This is the time to judge how that standard deduction stacks
up against the amount you'd be able to subtract from income if, like most
homeowners, you itemized deductions instead.
- Home mortgage interest
- All real estate taxes on any property you own
- Your state income taxes
- Charitable contributions
- Medical and dental expenses that exceed 7.5% of your income
- Personal property taxes if your state has them; and most
- Certain moving expenses
At the start of a mortgage repayment schedule,
when the debt hasn't been reduced yet, almost all of your monthly payment goes
toward interest. A bit goes toward reducing principal (the amount borrowed), so
that the next month you're borrowing a bit less, and owe a little less interest.
That allows more of your next payment to go toward reducing principal. However,
this process is very slow in the beginning and the interest portion remains high
for many years.
Between the mortgage interest and the property tax deductions,
you can figure that Uncle Sam is shouldering part of your monthly mortgage
payment - 28% of it, in fact, if that's your tax bracket. Your state income tax
bracket can also be added to that, before you calculate how much you save on
income tax as a homeowner.