When the standard deduction for married couples filing jointly was increased from $12,700 to $24,000 for 2018, there was some speculation that the bloom was off the rose of homeownership. The thought was that if the tax benefits from being able to deduct the property taxes and interest was less than the standard deduction, that maybe the buyer would be better off continuing to rent.
With mortgage rates as low as they have been for the past eight years, payments have been lower and so has the amount of interest that was paid. This, and the fact that sales and local taxes, which include property taxes, are limited to $10,000 a year on the Itemized Deduction form, has made it harder to reach the increased standard deduction.
The reality of the situation is tax benefits are only one of the components that make a home an excellent investment and it probably contributes the least of the top three benefits. Principal reduction and appreciation build an owner’s equity in an automatic way that is like a forced savings account.
In today’s market, it is common for the total house payment to be lower than the rent a first-time homebuyer is currently paying. As a homeowner, the buyer would have additional expenses like maintenance and, possibly, a HOA.
To illustrate the net effect, let’s look at a purchase price of $275,000 with 3.5 percent down payment on a 4.75 percent 30-year FHA loan. We’ll assume the home appreciates at 3 percent annually and the buyer is currently paying $2,000 a month rent.
- Total Monthly Payment (PITI + MIP): $2,115.44
- Less Monthly Principal Reduction: $347.22
- Less Monthly Appreciation: $687.50
- Plus Estimated Monthly Maintenance: $100.00
- Plus Homeowners’ Association: $25.00
- Net Cost Of Housing: $1,205.72
The total payment is $2,115.44, including principal, interest, property taxes, property and mortgage insurance. However, when you consider the monthly principal reduction, appreciation, maintenance and HOA, the net cost of housing is $1,205.72. It costs $794.28 more a month to rent than to own. In a year’s time, it would cost $9,531.36 more to rent than to own, which is more than the down payment required to buy the home.
In seven years, the $9,625 down payment would grow to over $101,000 in equity. The equity buildup far exceeds the tax benefits, which some people would have as an additional incentive.
Visit tinyurl.com/tws-rentvsown to see what the net cost of housing would be using a home in your price range, or call me at (208) 309-1329 and I’ll do it for you.
