Friday, February 24, 2012

Why Rent if You Can Buy?

With both home prices and interest rates low, everyone understands now is a great time to buy a home. At least borrowers hear this but they don’t always understand exactly how and why this is the right time, especially if the other option is to rent.

The cost of renting is going up every month. We hear borrowers tell us that their landlord wants to raise the rent again, and often in a large percentage. In order to appreciate where the difference lies in owning a home versus continuing to rent, please print out the attached PDF and I will explain some of the finer points so you may reach out to clients you may feel could use this information.

First, the example is a comparison of either purchasing a single family residence with a value of $450,000 and putting 10% down or renting the same home for $2,500 a month. The total payment includes the principal & interest, taxes and insurance along with the mortgage insurance that would be required with a 90% loan. The assumption is first time homebuyers or renters may not have more than a 10% down payment.

Second, the Income Tax Bracket is determined by the income necessary to qualify for the home in this example. At $70,000 a year income, the borrower would be in an approximate tax bracket of 25% federal and 6% state. This total of 31% was applied to that portion which can be written off, the interest on the loan and the property tax. This is where I am supposed to disclaimer with, “please consult a professional tax advisor”. As you can see the government, in this example, would allow a write off monthly of approximately $532.
Why Rent if You Can Buy?

Now, if the client is a W2 wage earner and has 0 to 1 as their withholding rate from their paycheck, they can make adjustments to their withholding. Basically, they have their tax advisor calculate what amount to claim for dependents so the borrower can net monthly more money, approximately $532. This way if the loan payment is higher than their rent, they can feel comfortable making the payment and not owing Uncle Sam any more money at tax time even though they withheld less.

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