Also, unless you are buying an expensive house and paying a lot of interest or have lots of other deductions, it may not help at all. My 115K mortgage has certainly never helped my taxes.
This. We were saved from buying a grossly inflated house when the US had its housing bubble by looking at the rent-to-buy cost ratios and realizing that it was MUCH cheaper to rent than to buy.
Once housing prices fell by 30% and it became about the same to buy as to rent, we bought a house.
Note that for us, at least, the US mortgage interest deduction was more than offset by property taxes and utilities we didn’t have to pay in our apartment (trash, water).
I don’t understand what you mean. When comparing renting vs buying, the tax deduction lowers your cost to own. at 115k, if you have a 5% mortgage two thirds of your payment will be interest at 8 years in (on 30 year mortgage). If your effective tax rate is 20% without mortgage deduction, then you will save about 13% in that year(.2*2/3=.1333). The lower your effective tax rate, the less you will get back, but it is just one more factor in deciding.
Which is good if the landlord gets it fixed right away. If the landlord stalls getting your furnace fixed for a week or two, you might wish you could call someone yourself.
The answer depends on where you think prices will be going over the next 20 years, your salary, and what you predict of the rental market. Right after the crash the rental market in CA was bad for landlords, because so many people moved in with relatives, not even being able to afford a rental. Now it is a lot better, and all the two months free move in specials have vanished.
During the bubble a lot of people rented to try to save enough for a down payment, only to see prices rise faster than they could save. The ones who never bought were lucky, those who did were worse off than if they had bought earlier. I bought at the bottom, out of luck, so I’ve still got tons of equity.
Then there is the non-quantifiable benefit of eventually redoing the house exactly as you want it. You will have to replace things over 20 years. Add that in to your monthly costs along with the more regular maintenance.
We rented a house in NJ before we bought, and I was much happier owning one. I dislike moving, and when we wanted to add a sun room we could do so without having to find a rental house with one.
For US responders, in Australia:
Houses are grotesquely over-priced - we have amongst the least affordable homes in the world.
There is no tax relief for mortgage payments.
Most home loans are at variable interest rates. You can take out a loan at 5% and years later be paying 13%.
You can’t walk out on a mortgage, you are chased for the debt.
It depends on your location.
I own. I estimate my ‘effective rent’ as mortgage interest + taxes + condo fees + maintenance. I would not be able to rent a house of the same quality for that price.
Also, my ‘effective rent’ tends to go down each year as I pay off more principal.
We also put down more than 20% so that makes a difference. I wouldn’t advise anyone to buy if they didn’t have a decent downpayment.
Two more things to consider. First, while renting the landlord is usually resonsible for the upkeep and maintainance of the house, if the furnace or hot water heater goes its on them. Not so if you “own” the house…Second, up until this housing bubble of the last decade, home prices actually doubled every ten years, this means your $500,000 house may cost a million in 10 years…
Which should be, and is often the normal situation. When you pay a mortgage, you’re getting two things :
- the right to live in the house
- equity
When you’re renting, you get only the first thing. Hence you should normally pay less than the mortgage. The dysfunctionnal situation is in fact the situation where renting costs more than paying back a mortgage.
How do you figure? Let’s assume that someone builds a house and rents it out. They still have to pay the mortgage. What’s more, they have to pay for maintenance and taxes and whatever profit they want to make on the deal.
Do you really expect the owners to take a yearly loss on the property in the expectation that they’re going to have equity on the house in 25 years or so?
What you say only makes sense if the house is already fully paid for and depreciated or the house you’re renting is not the equivalent of the house you’d buy.
You are forgetting to factor in the landlord’s profit. Renting must cost more over the life of the property or the landlord is taking a loss. Renting should always be cheaper then the first year of home ownership, otherwise no one would rent, but at some point the land lord needs to break even.
I know several people for whom this is the case.
At the moment the UK housing market is depressed… we had a sharp drop in 2008 and things are yet to recover (like many other places).
Several friends are covering a shortfall in rental income vs mortgage payments for the time being, as they are on fixed-rate mortgages but have to adjust their rental charges to the market. They are also unable to sell their properties to make any form of profit until the market picks up.
However, spending £5k over the next few years to retain the property could see an eventual climb in prices which would net them 3-4 times that sum in equity.
Yeah, I mentioned that case in post #16. The problem for the renter, though, is that once real estate prices rise, the owner is either going to sell or raise the rent to a market rate. So it’s a situation you can take advantage of for a short time, but you can’t count on it for the long term that the OP needs in order to save up the money to buy a house. Not to mention that a financially strapped owner is going to skimp on the maintenance as much as possible.
Only if you itemize. The standard deduction is so large these days that for people in middle income brackets with small homes, it’s often not worth itemizing.
Here in Australia that’s not just possible, but the norm. Tax law allows the owner to deduct their loss on an investment property from their other taxable income. Landlords are more than willing to rent out a property at a loss, as long as they think the equity will grow faster than their losses (and for the last decade it generally has).
There are plenty of people here who don’t own the house they live in, but have at least one highly leveraged, loss-making investment property that they plan to sell for a zillion dollars in a few years time. What could possibly go wrong?
To the OP: The calculation that needs to happen is different for everyone, and different for various locations. You do have to take into consideration appreciation, tax rates, tax deductions and repair costs.
When I first did the math in the Seattle area circa 2005, it was cheaper to rent than to own. Now that property values have gone down, the math slightly favors ownership.
Repairs are one huge variable, though. If a homeowner is the do-it-yourself type, owning is probably cheaper. If a homeowner is the type who has to call a plumber to unplug the toilet, renting is probably cheaper. In regards to repairs, an owner always shoulders the risk and you have to factor risk into the equation.
Just thought I’d point out that most areas have rules about what has to be fixed and when. I know that in WA state, a residence cannot be without water, toilets, light or heat for more than 24 hours. A landlord is obligated to provide another unit or a hotel room (at landlord’s cost) if the repairs cannot be completed within 24 hours.
Sorry, but this is wrong. You must give up your standard deduction in order to take the mortgage interest deduction. The standard deduction will be worth more than the mortgage interest deduction unless you owe more than about $200,000 on the house (quick back-of-the envelope calculation, so don’t take this as a firm estimate). If you owe more than 200k, the benefit will be on the interest payment on the amount greater than 200k (again, estimate). of course, if you have other deductions you can still get a benefit for a smaller debt.
Quick rule-of thumb is that you will spend 1-2% per year on maintenance costs, on average. For a $500,000 home, build $5,000-10,000 into your budget.
The obvious solution to this dilemma is to rent until prices fall (or rents increase) to the point that buying is cheaper, and then to buy. During the period that renting is cheaper, invest the difference. It is absolutely not a reason to buy now!
There are huge swaths of this country (primarily on the coasts), where this is the best course of action.
I will say that buying a house causes forced savings, and is important for people without financial discipline; for them it may make more sense to buy than to rent, even if renting is cheaper. For people with financial discipline, renting is, in my opinion, usually the better choice (purely opinion, feel free to have your own).
Believe it or not, that’s not always true. Sometimes it is cheaper to rent than to buy.
If an owner doesn’t have a mortgage, they don’t have to worry about the rent covering their mortgage. They simply can rent the house out for whatever the market will bear. Or, imagine an investor who’s mainly interested in the property appreciating in value. Many times, they’ll rent it out for less than their mortgage and simply look at it as extra income.
Also remember that if someone is in the home rental business, they get to depreciate the cost of the house over a 27 1/2 year period. Plus, they can deduct the cost of all repairs, interest, and mortgage costs. This means, that they can charge a bit less than the mortgage and still make money. Plus, if they bought the property for investment value, they can make money selling the home at its appreciated value.
In fact, a few people in the real estate business have mentioned a particular creed when to buy and when to sell. If it is cheaper to rent than to buy, you want to sell because real estate prices will drop. When it is cheaper to buy than to rent, it’s time to buy because real estate prices will be going up.
And, one more thing: If you rent, you can walk away from the house at any time. If you buy, you’re stuck with it until you can sell it which can take months and sometimes years. Imagine living in New York and getting a great job opportunity in California. If you have to dispose of your home, you might have to pass up that opportunity. If you rented, you could move to California in a matter of weeks.