Most people can't afford to buy a home, as Randy Moss put it, with "Straight Cash, Homey". If you don't have cash don't worry there are banks that will lend you the money as a mortgage. Traditional mortgages are amortized over thirty years. An amortized loan means you pay the majority of the interest in the first half of the loan and the majority of principal in the second half of the loan.
A mortgage payment is broken down into four parts. P.I.T.I. - Principal, Interest, Taxes and Insurance. Let's breakdown a hypothetical $2,000.00 a month mortgage.
$275.00 Principal
$1,350.00 Interest
$275.00 Taxes
$100.00 Insurance
Let's focus on the P and the I.
$275.00 a month goes to principal - A principal payment is similar to making a deposit in a savings account. It lowers how much you owe on the loan and when you sell the home, you get that money back in proceeds.
$1,350.00 a month goes to interest - Similar to paying rent, this money is just lost. It is a cost of doing business. Interest, however is tax deductible. If you estimate high and say that you are in the 33% tax bracket and multiply that by your monthly interest you get how much money you save per month by owning vs. renting. For example: $1,350.00 x 33% = $445.50 a month in tax savings.
In this hypothetical mortgage, you are saving $720.50 a month by owning instead of renting. If I were you, I would take that $720.50 and go on an all inclusive vacation to the Caribbean, but that is just one suggestion.
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Posted by: real estate | June 05, 2008 at 08:27 AM