Phil for Humanity Phil for Humanity
A Guide for the Survival of Humankind and Helping the World, Society, and Yourself.



To Rent or Own?


I noticed that a lot of people still cling to the common misconception that the tax deduction on the interest of a mortgage completely offsets the costs of the mortgage.

Letís assume a realistic scenario of two average people. These people both earn an annual income of $60,000; therefore, they are both in the 30% tax bracket. Also assume that the typical 30 year mortgage starting at $250,000 with a mortgage interest of $10,000 per year.

If the first person rented a home, then this person would not have a mortgage. Thus, this person would pay taxes on their full salary. This means $18,000 is for taxes, and the personís take home pay is $42,000.


If this second person owns a home, then this person would pay taxes after their mortgage tax deduction. Therefore, this person would pay taxes on $50,000 ($60,000 minus the $10,000 in mortgage interest). Since the tax bracket would not noticeable change much, this personís taxes would be about $15,000. Thus, the second personís take home pay is $35,000.

As you can see, the first person kept $7,000 more of their money than the second person with the mortgage. Each year, the first person could be saving thousands of dollars, and earning compounded interests on this saved money. After 30 years and assuming a modest 5% annual return in interests, this would result with almost $500,000. Thatís right. The first person would have saved almost half a million dollars, assuming they continuously saved their money that they did not pay to the mortgage company. This is not even including higher annual salaries each year, cost of living increases, inflation, and better investment returns.

During the same time, the second person would not have the extra $7,000 per year to invest (to be fair, the interest would decrease each year as the mortgage is being paid off). Instead, this person would slowly be paying off their mortgage while their home increases in value at a historical average of 3%. After 30 years, the second personís home would be mortgage free and worth an estimated $600,000. If you include the typical and periodic home repairs, such as new appliances, renovations, painting, new roof, etc., this will almost always definitely wipe away the profit that home ownership have over renting.


Therefore, the monetary difference between renting and a mortgage is probably favoring renting. To actually calculate this difference, it involves a lot of assumptions and guesses that makes accurately estimating both costs impossible.

However, keep in mind that renting has much fewer worries, headaches, and time consuming work such as landscaping. On the other hand, home owners typically have much more pride and respect. I guess which is better is more to an individualís preference, rather than a logical and monetary decisions.

As a result, I am not advocating either renting or getting a mortgage, but rather go into either decision with your eyes open. Some people prefer not being tied down to a mortgage and home, while other people prefer a safe real estate investment over the alternatives. Either way, giving your hard earned money to either the I.R.S. or a mortgage company means that a major financial decision that is not easy to decide.

by Phil for Humanity
on 03/25/2007

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