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Chapter 8: Problem 45

Because of the mortgage interest tax deduction, is it possible to save money buying a house rather than renting, even though rent payments are lower than mortgage payments? Explain your answer.

Short Answer

Expert verified
Yes, it can be possible for buying a house to be more economical than renting despite higher mortgage payments due to the mortgage interest tax deduction. This benefit can reduce the net cost of home ownership by reducing taxable income and thereby the amount of income tax paid. However, a full cost analysis should be conducted as there are several other factors to consider for both options.

Step by step solution

01

Understanding Mortgage Interest Tax Deduction

When homebuyer takes out a mortgage loan, they are often eligible to deduct the amount they pay in mortgage interest from their taxable income鈥攖his is known as mortgage interest tax deduction. In effect, it reduces the amount of income that is subject to tax.
02

Cost Analysis of Buying Vs Renting

When comparing the cost of buying versus renting a home, the mortgage payment is not the only factor to consider. The full cost of home ownership include the mortgage payment (principal and interest), property taxes, home insurance, maintenance costs, and any homeowner's association fees. In contrast, when renting, a tenant will only think of the monthly rent and any additional utilities or service fees not included in the rent.
03

Factoring in Tax Deductions

However, the mortgage interest tax deduction can greatly reduce the net cost of ownership by reducing the amount of income that is subject to tax. This is especially impactful if the homebuyer is in a high tax bracket. This can potentially shift the cost comparison in favor of buying a house, even if the mortgage payment is higher than rental costs.
04

Other Factors to Consider

There are also other factors to consider in the buying vs. renting decision, like the potential for home price appreciation and the emotional satisfaction of home ownership. However, these aspects are not quantifiable and therefore not covered in this exercise.

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Most popular questions from this chapter

In Exercises 11-18, a. Determine the periodic deposit. Round up to the nearest dollar. b. How much of the financial goal comes from deposits and how much comes from interest? $$ \begin{array}{|l|l|l|l|} \hline \$ ? \text { at the end of every three months } & 4.5 \% \text { compounded quarterly } & 5 \text { years } & \$ 25,000 \\ \hline \end{array} $$

In Exercises 11-18, a. Determine the periodic deposit. Round up to the nearest dollar. b. How much of the financial goal comes from deposits and how much comes from interest? $$ \begin{array}{|l|l|l|l|} \hline \text { Periodic Deposit } & \text { Rate } & \text { Time } & \text { Financial Goal } \\ \hline \$ ? \text { at the end of each year } & 6 \% \text { compounded annually } & 18 \text { years } & \$ 140,000 \\ \hline \end{array} $$

Describe what is contained in a credit report.

The cost of a home is financed with a $$ 160,00030\(-year fixed-rate mortgage at \)4.2 \%$. a. Find the monthly payments and the total interest for the loan. b. Prepare a loan amortization schedule for the first three months of the mortgage. Round entries to the nearest cent.

In Exercises 11-18, a. Determine the periodic deposit. Round up to the nearest dollar. b. How much of the financial goal comes from deposits and how much comes from interest? $$ \begin{array}{|l|l|l|l|} \hline \$ \text { at the end of every three months } & 3.5 \% \text { compounded quarterly } & 5 \text { years } & \$ 20,000 \\ \hline \end{array} $$
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