Buy a home now or later?

Question

so if you can write a house off of your taxes...from strictly a financial point of view, would it be better to make a small down payment on a home and pay for it as you can(with interest), or to save for a few years and pay for it all up front?

Answer 1

There are a lot of factors to consider in the financial considerations outside of just tax write-offs.

First is the time frame that you plan to live there. When you sell a home, realtors commonly charge around 6% of your selling price for their fees. So your property must appreciate over 6% in order for you to not lose money when you sell. And that doesn't include the money that you spend on improvements and maintenance. If you rent, you don't have to worry about any of that stuff. So you better hope that you're in a hot housing market when you plan to sell!

Second, to your point, is the tax considerations. You only get to deduct the interest that you pay on your mortgage from your income taxes. If you pay $1000 a month for your mortgage, it depends on what percentage of that is interest. Let's say that $500 is paying off the principle of the loan and $500 is paying off interest, and your tax rate is 20%. Then you could deduct $100 a month ($500 interest * 20% tax rate) off of your income taxes on your annual tax return. So you effectively pay $900 a month ($1,000 rent - $100 tax savings), in this example. This will change over the life of your mortgage as you start paying less interest and more principle each month.

Third, you have to think of the opportunity cost that you give up if you saved up all of that money to pay off a house up-front. In other words, what could you invest that money in instead? If you have $200,000 of cash, you could invest in the house or invest it in the stock market. If you hate risk and would choose government bonds that earn 3% a year, your house better appreciate more than 3% a year. If you're ok with risk and the stock market returns 5% a year, your house better appreciate more than 5% a year. If it doesn't, then you're losing money.

Fourth, by the time you pay out a mortgage, you may pay as much as two times of your house's purchase price over a period of 30 years. But, if you pay $1,000 a month for your mortgage, you would likely also pay $1,000 a month for rent, unless of course you lived with your parents for free. So it doesn't really matter that you're paying twice the house's value.

To pull it all together: If you pay $1000 mortgage a money, you would pay $12,000 a year. Counting tax deductions at 20% tax and $500 of your $1000 month mortgage payment is interest, you would effectively pay $10,800 a year. If you took out a mortgage instead of paying all $200,000 at once, you would have $189,200 in cash by the end of the first year. If you invested that $189,200 into the stock market at a 5% annual return, you would end the first year with just under $10,000 from your stocks. However, if you paid off your house all at once, you would have no free cash to invest. If you sell it next year, it will need to appreciate over 11% in order for you not to lose money (5% to make up for what you didn't make by investing in the stock market and 6% to cover the selling fee).

So to answer your question, I believe that it's usually better to take out a mortgage.

Answer 2

Buy low sell high. Home prices have come down a lot in the past 12 months. I expect maybe 6-9 more months of low prices before the Federal Reserve starts cutting interest rates in Fall or Winter 2007.

Depends on the market too. Some areas are continuing to increase in value.

Answer 3

you can't usually write a house off on your taxes. what you write off is the interest payments on your mortgage. from a financial pov you would be better off putting a 20% downpayment (to avoid pmi- mortgage insurance) and financing the rest at a low fixed rate.

Answer 4

You don't even have to put your money in the stock market to get a 5% return-- HSBC and ING Direct have money market accounts that are guaranteed 5% a year. They're great.