Renting is for Suckers

The Real Benefits of Having a Mortgage Payment
 

The media is loaded with misinformation about renting being superior to owning a home with a mortgage payment. Simply putting the two side by side and choosing the option with the lowest monthly payment. The logic behind this conclusion is completely ill-founded.

I was giving a presentation to a couple of first-time home buyers recently and I made a statement that I always knew, but never really brought it up verbally, so I’m going to share it now. 

Rent has one benefit:

• You get to live there with a roof over your head as long as you make your monthly payment.

A mortgage payment has three benefits:

• You get to live there with a roof over your head as long as you make your monthly mortgage payment
• A portion of your mortgage payment is principal—akin to a savings account
• The other portion of your payment is interest, which is tax deductible in most circumstances.

The principal portion of your mortgage payment goes to paying down the outstanding balance. Think of it as you paying you, or moving money from your left pocket to your right one. This is a forced savings account that accumulates a significant balance over the years by helping to increase the equity in your home. Combine this with price appreciation of the property and you have a very potent recipe for wealth creation. This fabulous financial benefit does not exist anywhere in a rental agreement…

The second benefit of your mortgage payment is the interest paid portion. This doesn’t sound like a benefit, but it is. It’s tax deductible! 

It’s quite simple: as an example, let’s say you’re making $150,000 per year and paying taxes annually on that amount. Throw in a $30,000 mortgage interest expense at the end of the year and you’re now paying taxes on $120,000 (as long as you itemize). This not only reduces your tax liability on the surface but could also have the effect of driving you into a lower tax bracket. Please consult with your tax advisor for further information.

In summary, renting simply transfers the benefits of a mortgage to your landlord while you watch home prices go higher and higher—without your participation.

Paying rent is for suckers…