OK. I think that’s a little strong, but I’m hearing this more today from renters who are considering entering this hot housing market. By the time I get this question, it’s more like, “Vern, tell me EXACTLY how much more money I will have in my pocket?”
My first response is, “Well, as you know, you are a very special and unique person.”
And I mean this sincerely. Every person’s tax and budget situation is unique. But this is a relatively simple math problem and you should be able to get pretty close to your unique number.
So pull out last year’s budget (or check book and credit card statements) and tax return and we’ll get started.
First some savings:
You won’t have a rent payment. There’s no renter’s insurance. You can subtract any rental-related utilities you are paying – gas, heat, water, etc. You may have to travel fewer miles to work, so you might save some gas money.
You probably will have some tax savings IF you itemized deductions. Remember, your tax savings will not exactly match the amount of your deductions on a one to one basis. You savings will depend on your tax rate. So if your tax rate is 20% and your deductions are $1000, your tax savings will be about $200.
So what’s deductible? Probably the largest deduction is your mortgage interest and, in the early years of your mortgage payments, usually interest makes up a large percentage of this payment. You can also probably deduct your property tax and mortgage insurance payments. I say probably because higher income individuals may lose some or all of some deductions. If you pay points to get your loan, you may be able to deduct them.
If you run a business out of your home, you may be able to deduct home office expenses.
You or I need to run these numbers through last year’s tax return, adjusting for this year’s changes. This is the only way to get close to what your actual savings might be.
Now some of the costs of home ownership:
I’ve already mentioned a few. Of course there is the mortgage payment, property taxes, and mortgage insurance.
You will have to get homeowner’s insurance. You will have utilities. You may have maintenance costs – whoops, there goes the furnace. Someone will have to maintain the lawn. You might have homeowner association dues. You may need a little remodeling or some fresh paint.
You may need some appliances. You may need some furniture.
Rack your brain because this is a long term commitment.
There you go.
Add it up and you should have a reasonable dollar estimate of how much cash home ownership will put in (or grab out of) your pocket!