So, I was watching last week’s episode of “Bought & Sold” on HGTV. They profiled a couple who were considering their first home purchase.
Their real estate agent was ecstatic. He said he really enjoyed helping first-time homebuyers. He liked to educate them about buying a home. And, helping them live the “American Dream”.
He was extra-specially happy this time, because, according to him:
“Their rental payment was the equivalent of a mortgage payment.”
The couple would be able to own a home for what they were paying in rent, each month.
That’s where I got a little nervous.
The show quoted their current monthly rent at $1,250.
The final purchase price of the condo they bought was $372,500.
Now, they didn’t say how much they had to put down. Best case scenario is that they put 20% down. (I’m guessing they didn’t put ANY down, based on the way they were portrayed in the program – “We never thought we’d be the types of peoples who could buy these sorts of homes …”)
So, here are the calculations:
Monthly mortgage loan payment (20% down (loan=$298,000), 5.75% 5-year ARM): $1,739
Monthly condo fee (quoted per the program): $253
Monthly property tax (annual $4,200 per the program / 12): $240
Total monthly housing expense: $2,232
So, that’s obviously a lot more than $1,200 per month.
But, there are income tax benefits for people who borrow money to buy their homes (I know, sucks, right?)
Income tax benefit, year one (estimate):
The new owners will pay approximately $1,400 / month in interest, during year one, so over the first 12 months they’ll pay $16,800 in interest.
If they itemize, then they will be able to reduce their income tax by approximately 25% of that amount, or $4,200. This = $350 / month.
So, their total monthly housing expense of $2,232 will be reduced by $350 per month, to $1,882.
Property tax benefit, year one (estimate):
Annual property taxes are $4,200. If they itemize, then they will be able to reduce their income tax by approximately 25% of that amount, or $1,050. This = $87.50 / month.
So, their revised total monthly housing expense of $1,882 will be reduced by $87.50 per month, to $1,794.50.
Okay, their monthly rental expense is currently $1,250, and their monthly housing expense is going to be (approximately) $1,794.50.
Um, that’s $544 more, per month.
This is how people get into trouble.
You know, to a certain extent, how a person finances his or her home purchase is their own business. I’m not a mortgage broker, I’m a real estate agent.
That doesn’t mean I don’t realize the stupidity of people increasing their monthly expenses by 50% when they think they’re not.
And, of course, in this case, the agent is really getting too involved. It sounded as though he was encouraging them to buy, a bit too much.