MASH Cash

Dear Maggie,

I am paying rent and investing money into mutual funds for my future. I have done pretty well but I hate writing that rent check every month. Does it pay off better to rent and save or should I invest in a home?

Queen Midas

 

Dear Queen Midas,

The answer depends greatly on these questions:

1) Do you want the responsibility of maintaining a home?
2) Is your future destined to be somewhere else or are you going to be THERE for awhile?
3) Can you afford the down payment that will allow for rent-sized mortgage payments?

If you answered yes to all three questions, in most cases it makes sense to buy a home or condo. Here's an example of one situation in dollars: If you pay $800 in rent, which is not uncommon in the big city, you could end up with an after tax payment of $862.56 mortgage payments if:

1) You put down $25,000.
2) The interest rate is 7%.
3) You are in the 28% tax bracket.

The actual before tax payment is $1164.28 - and you have taxes and homeowners insurance to pay - but you are allowed to deduct your taxes and interest on the mortgage, which brings you to the after tax payment of just over the original rent. AND you get to build equity over the years and that is an investment. Also, since the payment is not much higher than the rent, you can continue to save to some degree through mutual funds.

Go to the bookstore and get an amortization book to help you calculate what you can afford. Be aware that you do need an emergency fund ($2000+) to take care of any unexpected home repairs. The downside is there is no more landlord to take care of that overflowing toilet problem. Aside from that it can be a rewarding and satisfying way to build equity and grow your assets.

Good luck!

Maggie