Rent vs. Buy

If you’re a First Time Homebuyer, you may not be entirely convinced that buying a home is cost effective for you; especially since, in addition to your monthly mortgage payments, you'll have monthly tax and insurance payments as well. But fortunately the federal government has set up generous tax laws to make homes more affordable for potential homeowners. Though you are required to pay property taxes on your home, these payments are deductible on your personal tax return. Additionally, the interest you pay on your mortgage is tax deductible. With these benefits, home ownership becomes much more affordable. Take a look at the below example which compares a rental payment with the likely housing payments on a $450,000 home purchased with 10% down. Also make sure to try out our Rent vs. Buy Calculator.

Monthly Housing Expense (Gross)		Buy		Rent
Rent/Loan Payment (P&I)		$2,025		$1,600
Property Tax1	+	$470		none
Property Insurance1	+	$75		none
Mortgage Insurance (if applicable)	+	$0		none
Homeowner Association Fees (if any)	+	$0		none
Total Monthly Payment	=	$2,575		$1,600
Income Tax Consideration
Monthly Interest Payment		$2,025		$1,600
Monthly Property Tax1	+	$470		none
Total Deductible Payment	=	$2,495		none
Income Tax Bracket (Fed & State)	x	34%		32%
Potential Monthly Tax Savings2	=	$848		none
After-Tax Housing Expense (Net)
Total Monthly Payment		$2,575		$1,600
Less Potential Monthly Tax Savings2	-	$848		none
After-Tax Housing Expense	=	$1,727		$1,600

Above Scenario assumes 90% financing on a $450,000 home with lender-paid PMI. First mortgage is a 30-yr fixed interest-only at 6.00%.

¹Assumes 1.25% annual tax rate, and 0.22% annual insurance premium

²Your savings assume you will itemize your deductions on Schedule A. Savings will be less if your other itemized deductions (e.g. state income tax and other charitable contributions) are currently lower than your standard deduction. Consult your tax advisor on all tax-related issues.