While having lunch with a Realtor friend of mine yesterday, he commented that most of his colleagues still have a hard time explaining to potential buyers the benefits of Home Ownership. At first I thought, wow, what are you doing in this business! But, it really got me thinking. There is a layer of negativity that is hovering over our industry right now. It's not just media. It is very real, to everyone out there, owner or renter. We know people underwater on their mortgages. We have friends and family members that are suffering through the foreclosure process or a short sale. Relatives that are enduring problems within condo associations or who cannot get their mortgages refinanced or modified, even though it seems that the bank would want to help them. Given the circumstances, it's really not that hard to believe that the very professionals who are supposed to be out there promoting home ownership, can't give a ringing endorsement for owning a home!
So, over the next couple of posts, I will try to accentuate the positives and give some perspective on what even Warren Buffet believes is currently a great investment.
The Mortgage Interest and Property Tax Deductions are probably the most tangible and easily sold benefits to Home Ownership, but also the least understood. Even I don't like getting into this one, in a general sense, because every individuals taxes are different and I am far from a CPA. So, I went online and pulled tax forms from irs.gov and put together a very simple example of how much owning a home can save a single property owner in a given year.
For this exercise, I am assuming the following. The tax payer is a Single Man or Woman, makes $75,000.00 a year and purchases a $200,000.00 home at 5% down. That would have them carrying a mortgage of $237,500.00. I used an interest rate of 5% on a 30 Year Fixed for my calculations. The only other assumption I made here is that the tax payer puts 10% into a 401K, reducing their taxable income to $67,500.00.
Taking the standard deduction of $3650 this year, that leaves their taxable income at $63,850 and leaves them with a tax in 2010 of $12,150.00.
Now, using the assumptions above, in the first 9 years of Home Ownership, the tax payer would pay no less than $10,000.00 in mortgage interest. In our area, they would also typically pay about $3750 in property taxes, which is also an itemized deduction associated with owning a home. That puts their Schedule A deduction between $15500 the first year in the home and $13750 by year nine. Now, here's what happens. That deduction reduces the taxable income, dollar for dollar. Subtracting that from your $63,850, puts the tax payer in a lower tax bracket, thus reducing there overall tax to around $8300. So, the home owner, between years 1 and 9, will save an estimated $3500-$3800 per year. That's $31,000.00 over nine years. Those are real dollars, not paid to the IRS, and a huge benefit to owning a home.
Now, this scenario is going to be different for everyone buying a home, but that's how it works. The Mortgage Interest Deduction is a very real, tangible benefit to owning a home. One that comes with a dollar sign attached!
Joe Burke
Your Chicago Mortgage Guy
773-742-6707
joe@yourchicagomortgageguy.com
