| If,
like most first-time buyers, you are presently renting,
it's easy to calculate your cost - simply, the monthly
rent you pay. (Utilities, phone, cable, and other
costs can be ignored in this comparison because
they'll be approximately the same whether you rent
or buy.)
But calculating the cost of homeownership
is much more complicated, because income tax considerations
affect your bottom line. And there is, in addition,
the uncertainty about how much the value of your
home will rise (or even fall) in the coming years.
As a tenant, you may be taking a
standard deduction on your income tax return.
This is the time to judge how that standard deduction
stacks up against the amount you'd be able to
subtract from income if, like most homeowners,
you itemized deductions instead.
Once you itemize,
you can deduct:
- Home mortgage interest;
- All real estate taxes on any
property you own;
- Your state income taxes;
- Charitable contributions;
- Medical and dental expenses that
exceed 7.5% of your income;
- Personal property taxes if your
state has them; and most important
- Certain moving expenses
At the
start of a mortgage
repayment schedule,
when the debt hasn't been reduced yet, almost
all of your monthly payment goes toward interest.
A bit goes toward reducing principal (the amount
borrowed), so that the next month you're borrowing
a bit less, and owe a little less interest. That
allows more of your next payment to go toward
reducing principal. However, this process is very
slow in the beginning and the interest portion
remains high for many years.
Between the mortgage
interest and the property tax deductions,
you can figure that Uncle Sam is shouldering part
of your monthly mortgage payment - 28% of it,
in fact, if that's your tax bracket. Your state
income tax bracket can also be added to that,
before you calculate how much you save on income
tax as a homeowner.
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