Buying a house is the largest financial transaction most of us will ever make in our lifetime. For this reason any responsible person considering such a transaction will have concerns and possibly doubts as to whether they are making a mistake ! If your concerns are financial consider the following: every adult has expenses associated with housing, unless you have an opportunity to live with a family member or close friend for free. Renting an apartment usually requires entering into a lease agreement and paying a monthly fee. This lease represents a commitment in the form of a contract much like a contract to buy a home. If you buy a home that costs $100,000.00 and the mortgage interest rate is 7% for 30 years your monthly payment will be $665.00. In addition to the monthly payment you will have to pay property tax, which in this example adds about $100.00 to your monthly cost (total monthly payment = $765.00). If you stop here and compare the cost to your rental cost you may conclude that renting an apartment is cheaper than buying a house depending on your current rent. It is important that you examine the real monthly costs associated with buying a home before you make a decision. A lease does not provide you with any tax deductions. While both a mortgage and a lease require that you make a monthly payment, your mortgage allows you to deduct a portion of that payment from your income tax. The choice here is whether you want to pay Uncle Sam or would you rather invest that money. You may already be familiar with the following analysis. If you are in a 28% tax bracket it means that 28% of your mortgage interest payment is probably income tax deductible. In my example of a $100,000 mortgage the first year you will spend $7,000.00 in interest. Twenty-eight percent of that interest is $1,960.00. If you divide this figure by twelve (=$163.33) and subtract the answer from the monthly mortgage payment shown above ($765.00), it means that your actual monthly cost for a house is $765.00 - $163.33 = $601.67. In other words your monthly lease payment does not provide a tax deduction therefore, the true cost is the total lease payment. However, your mortgage payment allows you to pay less taxes because of the ability to deduct the interest payment from your taxable income. But hang on I'm not finished ! In addition to the interest deduction you can also deduct your property tax from your personal income tax. In my example the annual property tax is $1,200.00 a year.


$1,200.00 X 28%(your tax bracket) = $336.00 $336.00 / 12(months in year) = $28.00

This means that an additional $28.00 can be deducted from your monthly payment, making the monthly payment $573.67 per year. This maybe cheaper than the rent you would pay for a comparable apartment. Remember these figures are based on my example. The cost/savings could be greater/less depending on your particular situation. Owning a home will require some additional costs, like maintenance, that would not be incurred by someone living in an apartment. But read on, because there are more financial benefits associated with buying a home !

You can buy a $100,000.00 house for as little as $2,250.00 down payment plus settlement cost (if the seller is willing to pay your settlement costs, you may not have to pay the settlement costs). If you have to pay settlement cost for this house you would need approximately $5,433.00 plus $2,250.00 down payment to make a $100,000.00 investment. Lets look at three scenarios:*


Scenario # 1: You invest $7,683.00 into a savings account at 5% interest (I'm not even sure you can get a rate this high as of September 2001). At the end of one year you will have a balance of ($7,683.00 + 384.15 interest) $8067.15.

Scenario # 2: You invest $7,683.00 into stock/bonds/mutual funds/etc and get a 15% gain at the end of one year. Your balance at the end of the year is ($7683.00 + $1,152.45 interest) $8,835.45.

Scenario # 3: You buy a $100,000 home and at the end of one year it increases in value by 2%. In today's real estate market 2% could be a conserative figure. Your original investment of $7,683.00 will now be worth $9,683.00. This means that you have a 26% return on your investment, and that same investment has supplied you with a roof over your head!!

*Note: no one can predict how much you will make on any investment. I used figures I have seen published recently. You can use your own figures based on information you have at your disposal. If you have any doubts about the information I have supplied here do your own investigation. Talk to a family member that owns a home. What's important here is that this person should have owned the house for a number of years, because like any good investment houses have both up and down years.