Aloha Coast Realty’s Blog of the Big Island

A lot of people are saying right now “oh, don’t buy now, things are still going to go down”. Whether or not that’s true, I don’t know, but I think people are forgetting the inherent advantages of home ownership. This is all obvious, so if you’re familiar with this, you can skip this blog entry. Same thing for people that already own a home; this may not apply to you.

Let’s say you are renting a 3 bedroom house for $1200 a month (a common price here on the East Side of the Big Island). That’s $14,400 a year.

Now, let’s say that you find a great house for $200,000 or $250,000 (you can find a really good house, pretty new, for $250,000 in HPP right now). Let’s say you have nothing to put down, but have really good credit (yes, 100% mortgages ARE still possible). Your payment will be in the $1700 a month range (including taxes, insurance and private mortgage insurance). So, at first blush, it looks like you’re taking a loss of $500 a month.

Factor in the tax advantages though and the picture changes. First of all, the interest is deductible from your income, so on the $250,000 mortgage you’re paying about $14,400 a year in interest plus another $1200 in private mortgage insurance and about $600 or so in property taxes. All of these are deductible and total just over $16,000 a year. So, if it totals $16,200 (the total of the example figures I used), you can deduct that from your taxable income. At a 25% tax rate (a common one), that will save you $4,050 a year or $337.50 a month. So the actual amount paid, in real terms, comes down to $1362.50 a month.

Still higher than rent, that’s true. But if you look at the equity build-up, you’ve paid down the mortgage by somewhere near $3000.

Note: these figures are rounded and are generalizations – everyone’s situation is different, so trust a tax person or your accountant to give you the real figures for you. Your actual cash out of pocket is about the same, but you’ve stuck a few grand in the “bank”, so to speak.

Let’s look at the scenario where prices decline another 10%. So that $250,000 house is now $225,000. Man, you’ve lost money! Not really. You’d save about $200 a month in the payments, so maybe now you’re at breakeven versus the rent. In the meantime, you’ve lost months worth of tax savings and have paid someone else’s mortgage. Its not like your rent went down.

If you have a job or other income, decent credit and don’t plan to leave the island in the next year or so, homeownership always makes sense. Gyrations of the market not withstanding.