First Time Home Buyers?

A home is an investment. When you rent, you write your monthly check and that money is gone forever. But when you own your home, you can deduct the cost of your mortgage loan interest from your federal income taxes, and usually from your state taxes. This will save you a lot each year, because the interest you pay will make up most of your monthly payment for most of the years of your mortgage. You can also deduct the property taxes you pay as a homeowner. In addition, the value of your home may go up over the years. Finally, you'll enjoy having something that's all yours - a home where your own personal style will tell the world who you are.

Look At this Example - Option 1 - RENT

Look at the graphic to the right. Shown here is a rental from Craigslist showing a 3 bedroom 2 bathhome for rent for $1,500. You will be spending $18,000 per year or if you stay in your home for the next 5 years you'll be spending about $90,000 (or more if there is a rent increase). The $90,000 covers a roof over your head but once it is spent it is gone forever.

Option 2 - Buy a similar home for $180,000

Property values are at an all time low. Prices have fallen 30%-50% since the market peak back in 2006/2007. It is a great time to buy a home even if you have never purchased a home before. There are lending programs specifically tailored to first time home buyers.

Now here is a property that is a short sale listed at$180,000. These homes are on the same street in Vallejo.

Back in October of 2007 this property sold for $370,000. The current price is subject to the lender's approval but it is being offered at more than 50% less than the property sold for in 2007. Will the property gain back it's value over time? No one can answer that question but over time property values will go up. Maybe not to the over-inflated property value levels back in 2007 but owning a property like this will appreciate.

The major benefit besides appreciation in owning a home is the ability to write off your interest, property taxes, and homeowners insurance. This will save you money on your taxes.

Let's Compare a $1500/month Rent Payment vs Similar Mortgage Payment

Let's say you rent for 5 years @ $1,500/mo = $90,000 in rent payments (not calculating any rent increases). On a $180,000 home, if you qualify for a 3% down payment program (or $5,400) with a loan value of $174,600 at 5.125% 30 year interest rate your mortgage payment would be $950.67. Estimated property tax (1.12% / 12 months) + mortgage insurance est $100 month your total mortgage commitment would be $1,444.36. Total Payments for Rent vs Buy are as follows in the table below.

Assuming you are in the 25% tax bracket your a mortgage tax savings as shown below would be $14,012.90.

Let's assume a modest appreciation in value of 2% per year and in 5 years your home is worth $198,734.54

Gain on Renting

Let's say you invested the down payment of $5,400 + 1% points of $1,740 + $1500 in closing costs = $8,646 at a 2.5% interest rate your after tax return after 5 years would be $9,426.82.

Gain on Buying

Sale Price end of year 5 is $198,734.54 less the remaining loan balance of $160,615.39 less the costs to buy your home originally (points $1,740 + buyers closing costs $1,500) less the costs to sell the home at end of year 5 (6% commission = $11,924.07 + sellers closing costs = $2,000). So gain on home sale would be $198,734.54 less cost to purchase and sell home $17,170.07 = a gain of $20,949.08.

Total cost analysis table below shows out of pocket payments to cover the rent payments vs loan payments less any gains or tax savings on the investment. If you were going to rent and invest the money you would have used for a down payment and buyers costs your total out of pocket would be $80,573.18. If you bought the property your total payments less your tax savings and gain on your home investment would be $51,699.62. Or a savings of $28,873.56.

In the rent scenario, if you did not invest the down payment and buyers costs, your out of pocket would be all of the $90,000. Your savings would be $38,300.38.

If you would like to talk to a lender about current loan programs for new home buyers please contact Greg Bechelli, Certified Mortgage Planner, 415-381-1385. You can learn more about Greg's services here.

If you have any questions about buying real estate please call us at 707-853-4864.