It’s that time of year again! No, I am not talking about March Madness or the finale of “The Bachelor” … It’s tax time! For some (like self-employed people) that have not been paying quarterly taxes, it is a time to pay the piper. But for the vast majority of us, it is the time of year where we can actually get a tax refund.
So, what is the best use of those funds? Like most questions, the answers vary depending on the individual situation. If you are swimming in debt it may be time to pay some of that debt off. If you have not funded your 401(k) for the year, perhaps that money is best used to invest in a tax deferred plan.
If, however, you are not taking advantage of all the benefits, of home ownership, it may be the perfect time to purchase a home. The average tax refund these days is about $2,800. Many loans only require that you put between 1 percent and 3 percent down. This means you may have enough money to close a loan with only the refund.
Did you know that the average monthly rent payment in our area is more than the average monthly mortgage payment? For example, the average monthly rent in Muskegon (February 2020) is $880. The medium home price is $128,000. After just 3 percent down, the payment with taxes and insurance would be about $830.
So, on average, the monthly expenditure owning a home is less than renting. But even if the payment was higher on the mortgage payment it would most likely still be beneficial to own? Why? Two main reasons: appreciation and amortization.
Appreciation: Appreciation is the rate at which the value of something increases in value. The average appreciation in our area is about 3.8 percent for real estate. For the last five years has been 6.3 percent! On $128,000, the forecasted appreciation gain in the next nine years (using only 3.4 percent) is $45,466! Compare that to rent where the is obviously $0.
Amortization: The second reason is amortization gain. Remember, while the amount you owe on a mortgage goes down over time and the payment stays the same, on a rental the amount you pay for rent will likely continue to go up. In 9 years, you’ll pay over $22,000 down on the home. When you rent, you’re just paying down your landlord’s mortgage.
So even assuming the cost of a Real Estate sale’s commission sale of 6 percent, in nine years you are $55,000 richer when you buy a home vs. renting.
Given this, as well as the emotional and text benefits of home ownership, tax time may be a great time to buy. Call me if you would like to talk further about your specific options.