RENTING & BUYING: THE DIFFERENCE

By Tricia Morris,
President, Premiere Mortgage

Homeownership may not be for everyone. Many people prefer to rent and to leave the details of ownership, property maintenance and other management aspects to the owner. However, one misunderstanding that can arise among renters who wish to become owners is the belief that their monthly mortgage payment should be no more than their current monthly rent. This misunderstanding is based on the failure to calculate the tax benefits of ownership and their effect of reducing the net monthly mortgage payment.

In fact, as a broad rule of thumb (understanding that there are specific factors in any given financial situation that may change over time), it’s generally understood that you can take about 20 percent off your mortgage payment to get an idea of the tax benefits that come with home ownership.

One way to get a better figure is to consult with a good mortgage broker who can give you an estimate of your mortgage interest and tax payments over time. Also, be sure to include other professionals in the tax field such as a tax attorney or a CPA when calculating your tax bracket and write-offs.

How does this work? First of all, in most cases homeowners can deduct both the amount of mortgage interest paid on their loan in the tax year and also deduct the amount of real estate taxes paid on their property. This provides a financial incentive to the homeowner verses the renter.

For example, let’s say we have two hypothetical individuals, one a renter and one a homeowner, with equal incomes of $60,000 per year. To help us out in our example, let’s put them both in the 25 percent tax bracket. On a straight calculation—assuming no other deductions— that means each would owe $15,000 in federal taxes.

The renter pays $1,000 per month and receives no tax benefits. The owner has a mortgage that he pays at $1,100 a month. In addition he pays $1,500 to the county in property taxes. His mortage interest in the last taxable year was $9,755. These figures total $11,255.

The owner can deduct this amount before he determines his tax liability. The renter must pay his income tax based on the $60,000 annual income. With the mortgage interest and property tax deductions, the homeowner has a taxable income of $48,745 and owes $12,186 in income taxes. That is a savings of $2,814 in taxes compared to our hypothetical renter. This comes out to $234 and change per month.

Bottom Line? The homeowner’s net mortgage payment—after taxes—is really $866 per month. The renter still pays $1,000 per month and gains none of the equity that comes with owning the property.

Even with the predicted rise interest rates; home mortgages remain a good buy and an accessible step in the process of building individual and family self-sufficiency.

Premiere Mortgage has offices in Kihei and Kahana and offers a wide range of mortgage broker services to Maui’s real estate professionals. Tricia Morris may be reached at 874-8800.

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