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Buy Vs Rent Paying Landlord Mortgage: You must have a dwelling
to call home no matter you pay a mortgage …or rent!
Your cash outlay will amount to a small fortune for you …or it will pay your landlord’s mortgage.
The more money you make, the better place you are likely to desire and consequently more cash outlay you should expect to go out of your bank account.
That’s IS money that should build wealth ...for YOU! …NOT for your landlord.
You may not be a ‘convert’ yet – but I would like you think for of a second: Do you think that the landlord would have his/her money tied up in a property and expect a ‘loss’ year after year?
I do not think so! As a matter of fact, landlords are ‘for profit’ organizations and – with very few exceptions - charge ways above the rate of inflation and, as the years go by, they increase the rent several folds.
Conversely ‘fix’ mortgage do not go up for the life of the loan that can be 15, 20 and more often 30 years – and still no increase!
On my page Buy Vs Rent Cash Outlay, I make a detailed analysis based on one of my client’s rental payments living in one single apartment for 11 years.
My homebuyer made a rough estimate that he may have paid in excess of $130,000 – when he moved not one penny of that was his. All he did - all those years - was to pay the landlord’s mortgage …plus some profit!
Through our joint strategy for him to become a homebuyer, he walked away from the aged question of “buying Vs renting” and walked into the home ownership!
My client secured a FHA loan, which allows homebuyers to purchase a home with as little as 3.5% down payment ...The purchase price was $195,000 - which means that the moment he walked from the closing attorney’s office, the amount of the $6,825 he put towards his down payment can already be counted as part of his equity!
By the time he paid the first month of his mortgage ($927.95 = Principal & Interest) he already had an additional $ 269.78 to his name!
The buy Vs rent paying the landlord mortgage does not stop there: First month interest was $ 658.17 and principal amount was the above $269.78.
It will be approximately $3,299.25 that he will pay towards the principal for the first year.
If you are wondering why the math is NOT 12 (months) X $269.78 (interest shown in the first month) = $3,237.36 - here is the reward for your thinking: Each month that your mortgage is paid, more of your dollars go towards the ‘principal’ and less and less of ‘interest!’
It continues to be so each and every passing month! By the year 16 to 17 more than of it goes towards the principal …and, the end of the life of the loan it reverses, and your mortgage payments will be almost all ‘principal’
There is another federal incentive to homebuyers that really makes you to weigh in this buy Vs rent paying landlord mortgage discussion – it is called Mortgage Interest Deductions (MID).
This program allows homeowners all across the country to deduct from you income 100% of mortgage interest paid every year of the loan!
Well, there are some limits or phase out – which I would like to call attention of those of you buying home in high priced real estate marked will be caped around that figure …however it is still a great incentive – that your rental will not provide.
There is a phase out amount …Only interest on the first $1 million of debt to purchase a house or $500,000 for a married couple filing separately -- is deductible.
By the way mortgage interest on most second homes also will qualify for tax deductions as well.
Interest above this amount still can have some more limited deduction, according to the Internal Revenue Service (IRS) website.
In any case, via MID, my client will also have $5,239.21 that he will be able to deduct from his income tax next year …AND, for the 30 years, he will have $1,000s more to deduct each year although we have to keep in mind - as discussed above - that with the passing of time every payment offsets some of the principal and shrinks the interest part.
I have written about MID and other homebuyer tax incentives with more detail on my page Buy VS Rent Tax Advantages
Renters come shorthanded on what one can get by paying rent every month and the consideration of buy Vs rent paying landlord mortgage - there isn't much you can depreciate or deduct from your rent payments.
Homebuyers on the other hand will have several incentives - for instances, when you buy a home with a FHA or conventional and you put less than 20% down payment, it is very likely that you will pay mortgage insurance premium (MPI)
That is an additional cash outlay that can be offset from your tax income.
According to the IRS publication above “You can treat amounts you paid during 2014 for qualified mortgage insurance as home mortgage interest.
The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006.”
I believe that this policy should continue for the sometime to come, however per my usual recommendation – consult your tax preparer or lawyer.
In closing – you need to have a dwelling to call home:
I have written on another page of this series that only those who will have to move in 4 years or less like those in the military ...Other than that:
a) If you can afford to pay rent, most likely you will be able to pay your mortgage
a) Landlords are not 'charities' they are in the business to make a profit
b) Beware that your rent is paying the landlord's mortgage!
The ball is now on your court! ;- )
Knowledge Base - This series dedicated to explore the Buy Vs Rent quest is comprised by 8 intertwined articles. I recommend that you further your knowledge by reading all of them - enjoy …AND learn!
Now it is YOUR turn: Please give us your input!
Do you have some great comments on this topic you would like to share? Any question burning on your head? I would love to publish
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JC Fagundes, Associate Broker
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