Renting Vs. Buying Real EstateRenting VS. Buying Real Estate
For most people, the chance to trade nondeductible rent payments for mostly deductible mortgage payments is a powerful inducement to trade a rental home into a home of your own. This is by far the single most important reason why people decide to buy their first home.
However, whether you are considering your first real estate investment, planning to move up, or expanding your real estate portfolio, the number crunching necessary to figure out how much house you can afford depends on two calculations: one for actual monthly outlays, the other for the true, after tax costs.
In the early years of your real estate mortgage, nearly all of every monthly payment is interest. This means you are only paying off a tiny bit of the loan principal, but it is good news in terms of tax savings.
The monthly payment for a $100,000, 30-year, 8% mortgage on your real estate would be about $734. In the first year of your mortgage, $7,970 of your $8,805 payment or 91% would be deductible as mortgage interest. Even in the tenth year, almost 81% of your payments would be deductible. What this is worth to you depends on your tax bracket but this tax savings built into the home-buying equation is why you can afford to make higher mortgage payments than your current rent payments without squeezing your budget. There is no similar tax subsidy for renters.