If, like most first-time buyers, you are presently
renting, it's easy to calculate your cost - simply, the monthly
rent you pay. (Utilities, phone, cable, and other costs can be ignored
in this comparison because they'll be approximately the same whether
you rent or buy.)
But calculating the cost of homeownership is much
more complicated, because income tax considerations affect your
bottom line. And there is, in addition, the uncertainty about how
much the value of your home will rise (or even fall) in the coming
years.
As a tenant, you may be taking a standard deduction
on your income tax return. This is the time to judge how that standard
deduction stacks up against the amount you'd be able to subtract
from income if, like most homeowners, you itemized deductions instead.
Once you itemize, you can deduct:
* Home mortgage interest;
* All real estate taxes on any property you own;
* Your state income taxes;
* Charitable contributions;
* Medical and dental expenses that exceed 7.5% of your income;
* Personal property taxes if your state has them; and most important
* Certain moving expenses
At the start of a mortgage repayment schedule, when
the debt hasn't been reduced yet, almost all of your monthly payment
goes toward interest. A bit goes toward reducing principal (the
amount borrowed), so that the next month you're borrowing a bit
less, and owe a little less interest. That allows more of your next
payment to go toward reducing principal. However, this process is
very slow in the beginning and the interest portion remains high
for many years.
Between the mortgage interest and the property tax
deductions, you can figure that Uncle Sam is shouldering part of
your monthly mortgage payment - 28% of it, in fact, if that's your
tax bracket. Your state income tax bracket can also be added to
that, before you calculate how much you save on income tax as a
homeowner.
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