While buying a house has many benefits from a personal standpoint, it also can have financial benefits. That monthly rent you’re paying could be going towards a home where you build equity and enjoy deductions on your yearly taxes. Let’s take a look at a scenario where you currently pay $1,500 a month in rent and how that expense could be flipped into an investment:
First of all, if you’re paying $1,500 a month in rent, that equals $18,000 a year in rental expense, $54,000 in three years, and $90,000 in five years. Certainly, there are good reasons to rent a house for the short term, but if you’re planning on staying in an area for a while, the money you spend on rent quickly adds up – and it’s all going out, rather than anything coming in to you.
While a mortgage doesn’t necessarily cost less each month (your circumstances depending) the dollars you pay can serve as a form of investment. If you buy, for example, a $300,000 home with a 5 percent down payment, your payment will be around $1,240 plus taxes and insurance, based on a 30-year mortgage with a 3.25 percent interest rate. And – that $300,000 home value almost certainly will increase over time. Using a modest five percent appreciation rate per year, the home’s value would increase by $15,000 the first year and $15,750 the second year. Using this estimation, the $300,000 home would be worth $330,750 after two years. By paying your mortgage monthly, just as you have paid rent, you added over $30,000 to your assets in two years!
It’s also worth noting that if you had “sat out” those two years and continued renting, it would now cost you approximately $330,000 to get the same home you could have bought for $300,000. That’s a ten percent increase – no small amount when dealing with a large purchase!
In addition to equity that can grow over time, you also may be able to deduct mortgage interest for your yearly taxes. The way mortgages are structured, much of your payment in the early years is interest. If you have a 30-year mortgage of $285,000 with a 3.25 percent interest rate, for example, you’ll pay about $9,000 in interest each of the first two years. Deducting that amount from your yearly income could result in substantial tax savings.
This means that with a home purchase you’re likely earning equity, saving money on your taxes, and enjoying the personal benefits of a home you own. Instead of paying $36,000 in rent over two years, you will have had about $18,000 in tax deductions and gained about $30,000 in equity. Obviously, it can take preparation and effort to buy a home, but if you’re ready to talk about your options, give me a call!
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