With virtually full employment in most of the nation and interest rates that have remained below 8 percent for more than a year, the home buying market is hot.
Perhaps you're still renting and wondering if this is the time to jump in. While nobody but you can make the actual decision, there are now tools at your fingertips to help sort out the pros and cons.For example, Countrywide Mortgage has added a feature to its Web site -(www.countrywide.com) - that allows you to plug in figures to see whether you're better off renting or buying. You can play out numerous scenarios this way and print out the calculations to study later.
First, you need to have some idea of what you might buy. The questionnaire asks for the price of the property you're considering, a mortgage amount, a loan term (usually 30 years) and a mortgage rate (you can use 7.5 percent as a ballpark figure right now). Then put in your state and income tax bracket and the calculator goes to work. It will estimate a property tax for you, based on rates in your state.
Here's what the calculator found for a potential Ohio home buyer now paying $750 a month in rent and considering a house priced at $120,000 with a $115,000 mortgage at 7.5 percent interest. The buyer is married and in the 28 percent tax bracket.
The calculator found that the monthly payment for the home buyer would be $912 compared with the $750 rent, an increase of $162 a month. But taking the federal tax deduction for mortgage interest into account, the $912 monthly payment drops to $823.
Then the calculator totes up the annual mortgage interest - $8,582 - and the annual property taxes - $2,160 - for a total of $10,742. Both the mortgage interest and the property taxes are deductible, allowing you to itemize instead of taking the standard deduction for married couples, $6,900.
Because you're able to itemize, you'll save $1,076 in taxes annually if you buy instead of rent.
The calculation works like this:
Mortgage interest paid in first year - $8,582
Annual property tax - $2,160
Total - $10,742
Minus $6,900 standard deduction - $3,842
Annual savings ($3,842 x.28) - $1,076
When you're using the calculator, keep in mind that the monthly payment for buying a house includes not only the principal and interest but also an estimate of taxes and insurance. In the case cited above, the $912 payment includes principal and interest of $804.10, with the rest going for taxes and insurance.