Buying a home can save you money

When can buying a home save you money?

There are two ways buying a home can save you money.   First, if you are currently a renter and now purchase a home, instead of paying money into the landlord, you will be ‘saving’ part of your monthly payment by investing in your home.  The second way buying a home can save you money is when the addition of mortgage interest paid, and real estate taxes paid increase your itemized deductions on your annual tax returns such that they exceed the standard allowed deduction.  Whoa – how do can you figure this out???

Let’s break it down.  Per the IRS, each year individuals have the option of deducting from taxable income the greater of either the standard allowed deduction, or their itemized deductions.  These two deductions, standard or itemized, reduce the amount of income which is taxable by the federal government.  So the greater the deduction, the less we pay out in taxes.

For the 2012 tax filing year, the standard deductions are:  $11,900 for married couples filing jointly, $5,950 for singles & married couples filing separate, and $8,700 for heads of household.  So if you are filing jointly as a married couple you will deduct the standard deduction of $11,900 unless your itemized deductions add up to greater than $11,900.

Itemized deductions include things such as medical premiums, medical costs, sales tax paid, charitable contributions, business expenses, AND, mortgage interest, mortgage points, and real estate taxes.  So where you previously may have added up your itemized deductions and they weren’t greater than the standard deduction, it is possible that with the addition of mortgage interest and real estate taxes, you will have a greater deduction on your tax return. 

Let’s take an example.  On a $200,000 30-year mortgage @ 3.8%, one year of loan payments would total around $11,183 (monthly payments of $931).  In the first year, $3,646 is paid to reduce the total loan amount.  Payments to reduce the loan are considered invested into the home as equity.  The remaining, $7,537 is paid out as interest.  The entire $7,537 is deductible as an itemized deduction.  In addition, let’s say taxes paid on the property are $1,500 for the year.  The entire $1,500 is deductible.  So now in addition to previous itemized deductions, you would have an additional $9,037 to add to it.   If you are a married couple filing jointly, you will take the $11,900 standard deduction unless your itemized deductions add up to greater than $11,900.  In this case, your itemized deductions are already at $9,037 without adding on deductible business expenses and charitable donations, or other allowed items.  Can you see how you might end up with itemized deductions greater than the standard?  In fact, you could do some tax planning to make sure it happens if you find that works to advantage.

 

 

Now we’ll discuss how renting versus owning can save you money.  Let’s look at it through an example.  Using the loan information above we know a 30-year $200,000 loan, at a rate of 3.8% has a monthly loan payment of $931.  Let’s assume a couple is paying $1400 a month in rent, plus $50 for trash pick-up and a parking space. 

They have saved up around $16,000 for a down payment and closing costs on the purchase of a home.  Under their current budget of $1,450 monthly rent expense, with a loan payment of $931they still have about $450 a month to cover other monthly home ownership expenses, such as Real estate taxes, Homeowner’s insurance, potential Mortgage Insurance, potential Homeowner’s Association dues, and other miscellaneous Home Maintenance expenses. 

So if they purchase a home, each month a portion of their monthly $931 loan payment will reduce the loan principal and be ‘invested’ in the home.  When the couple eventually sells the home, assuming they sell the home for more than the balance of their mortgage, they will get back all of the money they have invested into the home at the close of the sale.  On the other hand, if they continue to rent, all of the $1,400 monthly rent is paid out with no return.  Further, the purchase of a home also allows them to deduct interest and real estate taxes paid on their tax return as discussed above!

Buying a home can indeed save you money!  Between the tax deductions and the investment into your home, buying a home can indeed be the thing to do!

Still a little overwhelmed?  Don’t know how to apply this to your own situation?  A REALTOR ® can help; this is part of their job.  Contactme, I am more than happy to assist.

A REALTOR® will help you walk through this information and connect you with a mortgage lender.  The mortgage lender will calculate what types of loans and loan amounts your situation indicates are appropriate.  Then you can work with the REALTOR® to see what homes you can purchase at that price point.  Who knows, maybe you are in a situation to start saving through buying!

Other resources:
Another resource discussing renting vs. buying at Realtor.com.
A rent vs. buy calculator at Realtor.com.

Kristen Richardson is a Realtor with Keller Williams-Franklin.

TN lic# 325119
9175 Carothers Parkway, Ste 110, Franklin, TN 37067
o: 615-778-1818, c: 615-243-8073
Kristen@FromHereToClose.com
www.FromHereToClose.com