With rental rates near record highs, we are frequently asked to tout the benefits of buying over renting. With interest rates so low and the tax benefits so high, it is not difficult to make the case for buying.
Below is a general example for a hypothetical $700,000 purchase. We are happy to provide more specific examples if we are sent actual rent payments and purchase prices.
A $700,000 property in a desirable area will rent from $3,500 to $4,000 per month in the current market.
That same property can be purchased with slightly over 10% ($75,000) down (to get below the conforming loan limit of $625,500).
B/c rates are so low (4% or less today for “no points” and “no fees”), the total payment for that purchase (PITI + PMI) will be under $4,200.
And b/c the buyers can deduct ALL of their annual interest (about $25,000) and property taxes (about $8,750), their total income tax bill will be much less each year, and this will offset their mortgage payment directly.
Their actual tax savings will be about 35%* (combined state and Federal tax rates) of the total of their taxes and interest, or about 35% of $32,750, or about $11,500 per year in actual tax savings. This is almost $1,000 per month in tax savings. This literally and directly offsets their mortgage payment by $1,000 per month. Buyers can “realize” their tax savings immediately by increasing their number of dependents and their take-home pay.
*The combined tax rate can be higher or lower depending on income levels, but 35% is a “conservative” number for buyers in this price range. Many buyers will be in a combined 38% bracket.
In any case, the buyers in the above example will have an “after tax housing payment” of about $3,200 – much less than the rent they would pay for the same house.
Founder/Broker | JVM Lending
(925) 855-4491 | DRE# 01524255, NMLS# 335646