Mortgage Deductiion Tax Efficiency

I'll admit it, I was taken in by the notion that buying a house was more tax efficient than renting. Everybody knows about the mortgage tax deduction, real estate agents positively shine when they talk to first-time home buyers about the savings. But I figure it's a pretty big decision to make based on rumors, so I sat down and worked the math on the mortgage tax break. In my case, and in the case of about half of American homeowners, it's not worth a dime. In the case of those homeowners who do take the the mortgage tax deduction, I'll bet the savings comes to less than the property tax for most of them.

The problem is two-fold. First of all, taking the mortgage tax deduction requires itemizing versus taking the standard deduction. If your itemized deductions on Schedule A come to less than the standard deduction for your filing status, there's no point in itemizing, you'd be throwing money away. Second, if you aren't already paying a lot of taxes and a whole lot of mortgage interest, the savings won't amount to much. It's a great deal for wealthy people who keep upgrading to more expensive homes, especially if they buy them in elderly areas with small school systems and low property taxes:-)

Check out the math if you're curious, but the bottom line is that the average American won't save beans on their taxes by purchasing a house with a mortgage. I went to the bother of figuring it out because I'm trying to talk myself into buying a house. It didn't help. I'm really focused on finding a rental at this point, and I'm spoiled by renting furnished. I'm beginning to see some furnished off-season vacation rentals showing up on craigslist, lake front properties in New Hampshire that the owners are trying to rent from September through May. The time frame sort of works for me, but many vacation properties are built without garages. Also, I'm not sure about the building codes in New Hampshire, I don't know that they are required to do energy audits, so some of these places may be near impossible to heat in the winter. I did see one that included heat, and I think I'll drop them a line.

Mortgage Payment Calculation And Interest

If you've ever wondered why the run-up in housing prices hasn't pushed inflation through the roof, it's because the Fed only cares about your mortgage payment. Since the mortgage payment has as much to do with the interest rate and the terms as it does with the cost of the house, the inflation in home prices has been hidden for years.

I keep trying to figure out mortgage payments in my head and getting it wrong because there's an exponential factor that's tough to approximate with guesswork. I wrote up an explanation of how to calculate your mortgage payment here, starting with the difference in how compound interest works depending on whether you're a lender or a borrower.

I've also been reading up on how the government looks at the cost of housing to the average American, and to the best of my understanding, they've settled on a cash flow basis as the best way to capture the effect of housing prices on the cost of living. Unfortunately, this maximizes the influence of both the monthly mortgage payment and the recent appreciation in housing costs. The way I read it, as housing prices roll over, the appreciation factor will turn negative and this will feed back into Fed funds rate by way of the CPI. The higher Fed funds rate will increase the mortgage payment for new buyers and those with adjustable mortgages, which will further depress house prices, increasing the negative appreciation and feeding back into higher interest rates.

Repeat as needed. The bottom line is I'm scared to buy now, I see no reason housing prices shouldn't retreat to 2003 levels.

Renting a House

Well, I ran out of time on my real estate search, so I'm stuck renting a house just to have somewhere to live. Typically, as soon as I signed the lease, better options appeared. The house I'm renting is in the Florence section of Northampton, MA. The rent is $1200/month, furnished, with the tenant paying all of the utilities. It's been a long time since I had the gas and electric in my name, so it will be interesting to see what they're running per month in the spring/summer. I'm estimating about $100/month together. The rental is short term, through July 31st at the latest, so I'll be continuing with my build or buy search in the interim. The rental was found through CraigsList, and was listed through an agent charging a finders fee equal to 60% of the rent, no pro-rating for the short stay.

I remember years ago paying a security deposit into an escrow account and wondering whether the landlord would try to hold onto some of the money for imagined damage. These days, with digital cameras, it's quite easy for the tenant to walk-through the house and take a couple dozen pictures, walk around the outside of the house and take a couple dozen more, then burn them all on a CD as a permanent record. That's what I'll do, because I've learned through the business world that contracts work best when everything is fully documented and everybody understands the conditions. It's misunderstandings and wiggle room that cause problems.

For somebody who's been living in apartments all his adult life, it will be a good reintroduction to the world of lawn mowing and sweeping sidewalks. I'm not going to start a program of home improvements on a house I'm renting for three or four months, but I'm sure there will be plenty home maintenance issues I've forgotten about. Since I bought a car last month from friends in town and it already has a recycling/landfill sticker on it, I'm set there. Besides, I don't produce a much garbage, maybe a kitchen bag worth every week or two. In the spirit of my renting an apartment last winter without noticing there wasn't a sink in the bathroom, I've rented a house with a two car garage without noticing if the bays are empty.

The $1200/month rent would have made a nice mortgage payment, closing on $200,000 if it's just the mortgage, without taxes and insurance. However, house prices are falling now in Massachusetts, and if you measure housing prices between now and the summer, I'm confident that the $1200/month will have paid less principal that the loss in value of the house, had I bought today. It's not just the sub-prime market that's in trouble, though the sub-prime loans certainly helped drive up the prices since housing prices are set on the margins. I'm gearing up to start a new financial research and writing project as soon as I move in, so expect to hear a lot more about the the phony housing compensation for negative savings that the eggheads have been blabbing about the past five years.