Renting vs. Owning
Have you ever questioned the benefit of owning your home vs. renting? Some of you have a difficult time realizing the financial benefits of owning your home. Certainly, it is not always your fault, because in many cases you have never been educated in this regard.
There is more to this than simply the dollar amount of rent vs. the dollar amount of mortgage payment. Following is a hypothetical scenario in which owning is more financially sound than renting:
- Rent: $1,000/month (for the whole apartment, not just your share)
- Mortgage: $1,150/month ($150,000 FMV @7% interest; including taxes and insurance)
- $10,500 of that mortgage payment is interest to the bank in year 1. Mortgage interest is TAX DEDUCTIBLE. If you make $35,000 a year, in a 25% tax bracket, you pay $2,625 LESS in taxes.
- Because of this tax benefit, you are now really paying $11,175/year for living expenses, instead of the $12,000 you would have paid in rent (SAVINGS: $825.)
- What about the closing costs I had to pay? Closing costs can be financed into your loan. You can virtually walk away from closing without paying anything.
- What about the maintenance on the house? You are saving $825 a year by owning — that money can be used for general upkeep.
- Remember, $10,500 is interest payment, $1,850 is taxes and insurance. $1,450 was paid to your principal loan balance — you now owe only $148,550.
- That money is still yours — although, it is tied up in the house. When you sell the house, you will get that equity back.
- On top of that, the house will have appreciated, increasing your equity even more!
| Renting | Owning | Difference | ||||
| Fair Market Value | $0 | $150,000 | ||||
| Monthly payment | $1,000 | $1,150 | $150 | |||
| Yearly payment | $12,000 | $13,800 | $1,800 | |||
| Taxes & Insurance | $0 | $1,850 | $1,850 | |||
| Tax deduction | $0 | $2,625 | $2,625 | |||
| Principal paid | $0 | $1,450 | $1,450 | |||
| Appreciation/year (%1) | $0 | $1,500 | $1,500 | |||
| Actual yearly | $12,000 | $8,225 | ($3,775) | |||
| Actual monthly | $1,000 | $685 | ($315) |
Accounting for all of your money, you end up paying only $9,725 for your living expenses, $2,275 LESS than in the renting scenario. $13,800 (total mortgage payment) - $2,625 (tax savings) - $1,450 (principal reduction that is still your money) = $9725.
NOTE: These numbers are rounded a little to make the math easier to follow. Not everyone is in a position to buy; but, if you don't take a look at the possibility, then you could be throwing money away each and every year.
