For any buyers who are hesitant about purchasing with all of the recent talks about the fiscal cliff, I thought I would provide some insight into what completely losing the mortgage interest deduction would mean for home ownership.
Some of the mortgage related tax topics on the table right now are:
- Cap mortgage interest deduction at a $500,000 mortgage, limit the deduction to primary residences
- Limit the deduction to no more than $25,000 worth of mortgage interest
- Eliminating the deductions for taxpayers earning $250,000 or more
- Cap all deductions at $35,000
While all of these could severely impact housing at a time of recovery, the bottom line is that even with losing all of the housing related deductions, the fundamentals behind buying still beat renting (especially at a time when mortgage rates are at all time lows!)
Let’s compare a scenario of the costs of owning with no tax benefits vs. renting: A $700,000 home in Rockville with 20% down kept for 10 years.
Own:
- P/I = $2,515, Taxes = $650, Home Insurance = $100. Total payment = $3,265
- Interest paid over 10 years = $175,000
- Total taxes over 10 years = $78,000, Home Insurance over 10 years = $12,000
- Home Repairs over 10 years (assuming $4,000 per year) = $40,000
- 3% closing costs on purchase, 7% closing costs on sale = $70,000 closing costs
- Total costs over 10 years = $375,000
Rent:
- Fixed rent of $3,500 over the 10 year period = $420,000
- Renter’s insurance of $50 per month = $6,000
- $140,000 in savings earning guaranteed 1% interest = $13,000 earnings
- Total net costs over 10 years = $413,000
Difference: $38,000. At the most basic level, buying wins, even without the mortgage interest deduction!
Add in home price appreciation of just 1% per year (home is now worth $765,000 – a $65,000 gain) and increasing rents of just 1% per year (total rent now costs $440,000 – an additional $20,000 expense) and the numbers become even more apparent. Buying now beats renting without any tax advantages by $118,000.
While I am by no means suggesting that now is a time for the mortgage interest deductions to be altered, I am however suggesting that there is no reason to wait to purchase, as purchasing still has significant upside potential, and in it’s most basic level still saves money over renting.
Hope everyone had a Happy Thanksgiving!
*** Please consult your tax advisor for any tax information specific to your scenario
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