Rent vs Buy, the True Cost to You
First Time Buyers
November 14th, 2008
As a first time buyer one of the big questions you probably have is how much more is buying going to cost you per month as compared to your current rent. You might think that is as simple as finding out what your total house payment, or Principal, Interest, Taxes and Insurance (PITI) will be and subtract from that your current rent in order to compare. Nope. By using that method you are not taking into account the income tax benefits of the mortgage interest and property tax deductions not available to renters. To help explain I put together this tax benefit calculator that can assist you in determining your true cost of renting.
| Loan Amount | Rate | Annual Interest | Annual Prop Tax | Tax Deductible | Tax Rate | Tax | Monthly Savings | |||||||
| based on1.25% | ||||||||||||||
| $200,000.00 | 6.25% | $12,500.00 | $2,500.00 | $15,000.00 | 20.00% | $3,000.00 | $250.00 |
In the example above I am using a loan amount of $200,000 and a fixed interest rate of 6.25%. With those terms the annual interest that you pay as part of your total payment (PITI) would be $12,500. In Shasta County our property tax rate works out to be about 1.25% so the annual taxes (PITI) are $2,500. Both of these are deductible items on your income taxes. In order to determine the monthly savings you will need to know your income tax rate (20% rate used in example above). You then take the Tax Deductible Amount X the Tax Rate and divide by 12 months. The resulting figure is the amount of money that you pay the IRS each month in addition to your rent. Using the example a person paying $1,000 per month in rent to the landlord is actually paying $1,250 per month in combined rent and tax. That amount is the more realistic figure to use when making a rent vs. buy comparison.
Keep in mind that this does not account for things like future rent increases, equity opportunities and the stability of ownership. I have to put the disclaimer here that I am not a CPA and you are encouraged to talk with a tax professional on how home ownership benefits you. Contact Us if you would like to have this tax calculator (excel spreadsheet) e-mailed to you.
