RENT VS. OWN

What A difference a deduction makes

Is the federal income tax mortgage interest deduction really a useful tool by which the government can promote homeownership? Homebuyers, particularly those on the verge of making the transition from renting to owning, but also those in the trade-up market, frequently seek information about how the mortgage deduction actually works.

The chart presented here gives an easily understood example of what a big difference that deduction does make. The chart—which is for general illustration purposes only because individual circumstances vary—was prepared by The Gooder Group Inc., a company based in Fairfax, Va., that produces prospecting brochures. The brochure, from which this chart is reprinted, with permission of The Gooder Group, was based on the “Yes You Can Buy a Home” theme that has been utilized by numerous boards and associations of REALTORS and has been the subject of previous articles in REALTOR NEWS.

How the Mortgage Interest Deduction Helps Homebuyers

John and Jane have a combined income of $50,000 a year. They purchased a home for $150,000,

putting 10% down and financing the remaining $135,000 with a 30 - year, 10% mortgage. Their

monthly principal and interest payments amount to $1,185 a month. Here's how the value of tax

deductions will save them cash in their first year and years to come.

(Figures are for illustrations only. Your figures may differ.)

As Renters

As Buyers

Income

$50,000

$50,000

Itemized deductions:

State income tax (6%)

2,500

1,700

Contributions & other

400

400

Interest Payments, 1st year

 

13,470

Points (3)

 

4,050

Real estate taxes

 

1,800

Total itemized deductions

2,900

21,420

Deduction used (standard or itemized)

5,200

21,420

Exemptions (2)

4,000

4,000

Taxable Income

40,800

24,580

Federal income taxes

7,401

3,687

Tax Savings: Federal

 

3,714

State

 

800

Total Tax Savings: First Year

 

4,514

First Year---Monthly

 

376

Annual (after 1st year)

 

3,700