Let's consider a typical home in the MetroEast area that would sell for $100,000. You could probably find and rent a similar home for $800 per month. If you purchase this home with a down payment of $5,000 and obtain a $95,000 mortgage at 6% interest, you would have a mortgage payment of $876 per month with Homeowner's Insurance and Real Estate Taxes included in that figure. Now it looks as though you'd save $76 per month. However, a great deal of that mortgage payment would be tax deductible, and that's where you will begin to come out ahead. Let's find out how.

Your $876 mortgage payment would include Principal, Interest, Real Estate Taxes, and Homeowner's Insurance. Much of this mortgage payment is deductible, because every penny of Interest and Taxes on a principle residence is deductible for homeowners. Between 90% and 95% of the initial payment is interest and taxes. With an annual house payment of $10,500 and 90% of that being deductible as interest and taxes, you would be entitled to a federal tax deduction of $9,450. In a 28% tax bracket, you would save about $2,646 per year in federal taxes

Add in additional savings if your state, like Illinois, has an income tax. The total tax savings between federal and state taxes would approach $3,600 per year. In comparison, none of your rent payment would be deductible. If we divide your tax savings by 12 months, your monthly saving is approximately $300, which more than wipes out the rent savings of $76 per month! So far, you are ahead $224 per month if you purchase.

In addition, anywhere from 1% to 20% of your mortgage payment will go towards the principal, depending on the type of loan you receive.  This money becomes a "forced savings account" -- increasing your equity in the house each month as you make your mortgage payment.  Otherwise, you might be tempted to do what most do -- spend the money elsewhere.

Let's say you do purchase this $100,000 home with 5% down payment. You'll have instant equity of $5,000 in the down payment. If you obtain a 30 year mortgage at 6% interest for $95,000, your equity build-up would increase by $6,600 in five years. This, in addition to your down payment of $5,000, equals $11,000 total equity, and that does not include any potential increase in property value. If this house appreciated only 2% per year, its value after the fifth year would be $110,400.

If sold at this point, this would give you a potential profit of $30,440 ($13,440 tax savings over renting, plus $10,400 appreciation in value, plus $6,600 equity buildup, not including down payment). You would pay closing costs on the sale out of that profit but would have the remainder in addition to your original down payment of $5,000 to reinvest. If you rented for those 5 years, what would you have in the bank?

What would be better for you -- to rent or to buy?

Remember, you will need to maintain your home in it's best and most attractive condition in order to experience a profitable resale.  So you might use some of those tax savings for general maintenance, repair, and redecorating.  In that way, you'll be protecting your initial investment, equity buildup, and appreciation in value.

Local lenders can advise you about the different types of loans available to you with some mortgages requiring as little as 0% to 3% for a down payment.  They can also tell you more about up front costs and monthly payment options.

Contact your tax advisor concerning these figures in relation to your own tax bracket.  Then, if you feel that a purchase would be the wiser choice, please call me.  I'll do more than help you find a place to live.  I'll help you buy a home where you'll love to live.