Look At These Numbers!
In practice, it works like this. Let's say your family income is $70,000 and you pay $1200 in rent. If you buy a home for $240,000 with 20% down, your payment might be $1558 a month. Don't get upset about the 20% for now, just follow me here for the sake of discussion.
The $1558 comes from a home loan at 7%, real estate taxes, and insurance.
I know $1558 per month is more than $1200, but wait! $1479 of that is a tax deduction, meaning in the first full year of homeownership, you would pay taxes on an income of $52,255 instead of $70,000. Since you are in the 28% tax bracket, you would save $4969 a year in taxes, or $414.05 a month!
(Disclaimer! I'm not a CPA, so I'm not qualified to give tax advice. The numbers I used assume you are already itemizing deductions on Schedule A. Consult your tax professional to see how the numbers work out on your specific tax return.)
So let's recap. Your rent was $1200, and now your mortgage payment is $1558, but Uncle Sam is giving you $414.05 of it! So your new cost to have that roof over your head is really $1143.95, less than you were paying in rent!
But it's actually better than that, because I haven't figured any state income tax savings. Oh, and remember that $50-100 a month I talked about back at the beginning of this article? That's the part of the loan that goes towards paying it back, called "principle reduction". I didn't figure that into the calculation either, but that's like putting that money every month right into the bank, the bank of your own home.
But you say, "getting money back from Uncle Sam is great, but how can I possibly make the $1558 payment with my current take home pay?" Well, you don't have to, you can take the extra money out of your check now, and let Uncle Sam tax what's left, remember? You do this by telling your employer to take less taxes out of your check using a W-4 form. This way, you get the extra $414 a month now to make the mortgage payment with, rather than getting a huge tax refund at the end of the year!
"But I still have a big problem", you're thinking, "Where do I get the 20% down, that's $48,000!" Yes, it is. Now we get to where the rubber meets the road. You have to really want your own home, really believe that this is what you have to do for yourself or for your family.
You can of course, buy with 10% down, 5% down, or even zero down, but in those cases, your monthly housing expense will be higher than rent, even after figuring the tax savings. If you can handle the payment, it still works out in your favor, because remember the 7% a year? That $240,000 house will be worth $256,800 next year, an increase of $16,800! So you might have to spend $200 a month more than you did in rent, but look - you paid $2400 a year more, but you gained $16,800. That's an amazing return, way better than a 401K, even a company matched 401K! If it were me, I'd put less in the stock market and buy my own home instead.
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