Does our tax code have benefits for homeowners? 

Lets look at renting vs. owning your own home. 

The amount of money a renter spends on rent can be about the same as the amount a homeowner spends on a mortgage. With the tax benefit for home owners, the savings for homeowners can be significant.  Though, if something breaks or becomes faulty it will be the homeowners responsibility to repair or replace as they no longer have a landlord.   

(1) One of the best known benefits of owning your home is the mortgage interest deduction.  Homeowners are allowed to deduct the interest paid on their primary residence.   If you have a home that you live in most of the year and also have a vacation home you can deduct the interest paid up to one million dollars.  You can also deduct interest on home equity loans up to $100,000.  

(2) If you’re a first time buyer, you can also qualify for the new $7500 Homebuyer tax credit.  A first time buyer means you haven’t purchased a home in the past three years or have not lived in a home you’re paying a mortgage on.  Unless Congress extends this, its set to end in mid 2009.  Like all tax credits, it means you can subtract the amount of your credit off your federal income tax liability which means you’ll either get a bigger refund or a smaller tax liability.  You still have to eventually pay it back, but its in essence, a no interest loan and the payback amounts to about $500 a year and you wind up with significant savings from this.  

(3) Going Green also makes sense.  If you add energy efficient appliances, energy efficient windows or perhaps new insulation, you may also qualify for a tax credit. Check with Colorado Springs Utilities  as they also offer rebates for installing more energy efficient items in your home.  

Ginnie Mae put together a wonderful chart that profiles renters and homeowners that compares returns in the two groups.  I’ve included it here, but you can click on the link to see it for yourself.   

Buy vs. Rent Comparison
The chart below shows a cost comparison for a renter and a homeowner over a seven year period.

• The renter starts out paying $800 per month with annual increases of 5%
• The homeowner purchases a home for $110,000 and pays a monthly mortgage of $1,000
• After 6 years, the homeowner’s payment is lower than the renter’s monthly payment
• With the tax savings of homeownership, the homeowner’s payment is less than the rental payment after 3 years.

The Ginnie Mae site also has other interesting items, like “how much can you afford calculator“, a “loan estimator” and it lists monthly expenses to determine what your payment would be.  Lots of good info can be found here, so you might want to check it out.

Looking at this, it seems clear that there are certainly costs involved in initially purchasing a home; though, if you are going to be in your home for more than three years, its also clear that you would save money by owning your home.  With interest rates in the 5% range, the savings would be even greater and considering that home prices are at the lowest they’ve been in years, it makes sense to contemplate purchasing now.