Is this a good time to buy, sell, or a combination of both?
Whether you are buying or selling a home, there is a lot that goes into this huge decision making process. With that said, over the next few newsletters I will try to discuss various areas that you will hopefully find useful with your decision making process on whether it is a good time to buy or sell real estate. Just know that there can literally be several factors to consider in your overall decision making process, so it is always a good idea to consult a professional in helping you determine whether you are making an informed decision.
Buying a Home: Increasing Rents Make Home Ownership More Appealing
On the plus side to buying a home in this market, rents in the Denver Metro area have made it much more appealing to own a home. Let’s do a comparison in paying rent versus owning your own home to see if it makes sense:
For example, let’s say you are paying $1,600 per month in rent. What would be a good comparison in owning your own home and the benefits it might provide?
When paying a mortgage, you have a few variables to consider; Principal, interest, taxes and insurance (commonly referred to PITI) that will typically make up your monthly payment to a mortgage company. I’m going to use generic numbers here, as real estate taxes and home owners insurance will vary from home to home in addition to having any down payment money that will impact these numbers.
Let’s say you are looking at a home and the real estate taxes are running $2,000 per year and your yearly home owners insurance runs $800 per year. That’s $233 per month we have to allocate towards taxes and insurance. If we deduct that from the $1,600 rent, that leaves you with $1,367.00 per month towards your principal and interest payment. If you were to take out a 30 year mortgage at 4% interest, that would buy you around $287,000 in real estate.
Here’s the bonus!! Mortgage interest and real estate taxes are tax deductible on your taxes. In a traditional mortgage, you are paying more interest than principal in the earlier years of a mortgage, so you could easily have $10,000 in interest along with $2,000 in real estate taxes (from this example) to deduct off of your taxes. If you were to have an average 15% Federal tax rate, which could save you $1,800 per year or $150 per month with the tax deduction.
This tax savings can be looked in one of two ways; either it will save you money over paying rent, or you can entertain buying more home with those tax dollar savings. Obviously a lot will depend on your monthly budget and what you can afford, but hopefully this provided you with some insight as to how owning a home is better than renting. More importantly, you are building equity every time you are making your mortgage payment, as the principal portion of your payment will ultimately build equity and wealth for you and your family!