How Taxes are going to keep me from buying a house.

Thanks for your replies guys, but I still have a few more questions.

If the property price didn't change, I think you actually get back 72,000 (600*12*10 = the amount you pay in principle) because you would still owe the bank 78,000 after 10 years. The saving differences I was thinking is more along the line of investing 9,850 (now I realized this is more likely to be 7,200 per bnb) in stock each year over 10 years vs. the increased value in the property after 10 years.

Ok, I missed the part on the tax saving. So I would save about 250 (2,900 - 2,650) plus or minus the differences between maintenance cost & rent increases each year. Assuming that the total saving is 300 per year over 10 years. Will this additional 3,000 plus the increased property value after 10 years out perform an investment of 7,200(600*12) per year over 10 years in the stock market (let's say fortune 500 index fund)? Anyone know the average rate of increases in Texas home properties over a span of 10 years?

 

rblh. I was thinking the house was 150k.. and then the interest etc.. but I guess we were thinking of a 72k house.... that is 150 after interest?

 

Rocket Fan ,

Sorry about the confusion, I do meant 150K plus interest. I guess my question boiled down to the differences between the money you put toward the principle vs. the same amount of money toward the stock market. The tax plus interest alone seem to just about offset whatever you have to pay in rent; furthermore, the property value in Texas does not seem to increase as fast as other state with the exception of the past few years.

 

Man, lots of #s flying around in here.

rblh,

When comparing all these #s, its not really fair to compare $1,200 rent to a $150,000 house.

The rule of thumb is, whatever the price of the house is that you are buying, multiply that by 1% and that will rougly your monthly payment, including P&I, PMI and taxes. So essentially, $1,200 a month for housing would cover the payment for a $120,000 house.

$120,000 can get you a 2,000 sq. ft., brand new house (new construction), in a pretty decent area of town.

Example:

$120,000 house

P&I (based on a 5% down payment and 6% interest): $683.49
Taxes (county and school based on 3% (which is high): $300.00
PMI (if you put 20% down, you dont have to pay this): $100.00
HO Insurance: $100.00

Total monthly payment $1183.49

One of the tricky things on mortgages is, the given portion on the P&I change month to month. That is, at first, most of your monthly payment goes to interest, and little goes to principle. The farther along you go, more of your payment goes to principle and less goes to interest. (example: the 1st month of a 30 year note, $600 goes to interest and $83 goes to principle; last month of a 30 year note, $600 goes to princeiple and $83 goes to interest).


Now, lets say you live in an apartment for 30 years, and pay that $1,200 a month. That's $432,000 that you will never get back. Ever.

Now, lets say you buy a house for $120,000. Lets say at the end of the 30 years, your house appreciates in value to where you can sell it for $200,000. Youve invested $432,000 in notes and taxes over those 30 years, but you get back $200,000.

Lets take a look at the tax breaks of home ownership:

Total property taxes over the lifetime of the house: $108,000 (approx)
Total mortgage interest over the lifetime of the house: $132,000 (approx)
Total tax write offs: $240,000

Assuming you are in a 15% tax bracket, thats a credit of $1,200 a year and $36,000 over the lifetime of the house.

Summary:

Renting over 30 years: $432,000
Return on renting after 30 years: $0

Buying over 30 years: $432,000
Return on buying after 30 years: $236,000



Buying a house can pay for your retirement.

 

People move every 5 years, on average. It messes up that rosy picture. The buy/sell is usually negative. And people will sink a lot of worthless cash into their own place because it's their own place. Drapes, carpet,whatever - stuff that fails to recoup it's cost. Most stuff can't. And then there's furniture you "need" and repairs and etc and etc. You've also got to figure selling costs.

On the other hand, I've made a tidy sum buying and now, building. So, maybe I'm full of crap. But for my sister, who moves every three years (or less) on new medical/research contracts - I'd think she'd be better renting. She won't of course - she likes a nice place that's hers for her kids - but financially, prolly better.

 

Pasox,

Even if you only live in a house for 3 years, you still come out better, because if you rent, you get 0% of the back when you move out. At least with a house, you get a lil bit back when you sell it.

Get a 7 year ARM, at 3 or 4% and you can walk out with a profit.

 

I don't think this is the case with interest rates where they are at (say 30 year fixed at 5.5). I suspect in Texas the P & I plus taxes for a 120K house (with 20 down) would be more like $850-950, even lower if you went with an arm (only do if you are sure to move in 4 years). Maybe if you included major maintainence (roof or AC type replacement every 5 years or so) on a 15+ year old home perhaps the old rule of thumb of 1% is reached or eclipsed.

 

I would go with a 15 year note if you can afford it. I was amazed at how quickly we started paying some serious principal instead of what seemed like almost entirely interest. We refinanced into a 15 from a 30. Four years later, we did another refinance because rates were so low and we could use some of our equity (housing prices here shot up) to pay off loans. We paid off 2 car notes that were at much higher interest and you couldn't deduct it. Now we are.

That's another factor about buying vs renting... the home equity loan. You can get a major loan at very, very low rates and use it to pay off other, higher interest debt. The other possible benefit is the refinance. If you've had your house a few years and have a decent equity, you can get the difference out to pay that other, higher interest debt. You have a lot more options than a renter. The major plus a renter has is ease of moving. Having to sell your house can be a bit stressful, depending on the market.

This is a good time to buy, imo. Rates are at or near historic lows, the economy isn't so hot and housing prices are affected. Depending on the area, you still might get a good price for the property, but it takes longer to sell. During the recent boom in Austin, there were houses in my neighborhood that sold as soon as they were listed, often for more than they were listed for. Now, they still sell... it just takes a lot longer and you will have to do some negotiating.

 

Desert Scar,

The 1% rule I quoted is based on 5% down, which is the most common down payment for 1st time home buyers (actually 3% nowadays)

$120,000 - 5% down = $114,000

P&I on $114,000 with a 30 year fixed at 5.5 = $647
Taxes ($120,000 x 3% /12) = $300
PMI = $100
HOI = $100

Total payment = $1,147 (roughly 1% of $120,000)

Obviously, with 20%, the monthly payment would be a lil less. But again, my figures are based on 5% down.