Wednesday, January 8, 2014 - Article by: Seth A. Jacobs - Northstar Mortgage Group, LLC -
Never confuse the amount of your monthly payment with the actual cost of owning. A typical monthly payment includes principal, interest, taxes, insurance and, in some cases, mortgage insurance.
$4,000 per year taxes
$800 per year insurance
$200,000 30 Yr. Fixed Loan at 4% = $1355 Monthly payment
The principal portion of the payment is not a cost; it's a reduction of the loan balance. With each payment, you increase your equity by the same amount. For our example, the average principal installment for the first year is $294/month. -$294 Principal Paid
Owners who itemize can usually deduct the cost of interest and real estate taxes. For our example, an effective tax rate of 28% would reduce the cost by $279/month.(Avg. 1st yr. mo. interest paid of $661 + taxes of $333.33 x 28% = $279) Always consult with your tax advisor regarding your situation. -$279 Tax Savings
Despite the ups and downs, over the last 50 years, annual nationwide appreciation averages more than 5%. Even using a more conservative rate of 3%, the increase in value represents $625/month. - $625 Appreciation
That brings us to: $157 Net Cost
Most of these benefits aren't realized until you sell, so owners still have to be able to make the regular payment each month.Accumulating equity and earning appreciation take time. Consider the cost of maintenance and repairs, too. But when you think about what you would have paid in rent, it's clear that owning a home can be a great way to build wealth.
And it's also clear that the true cost is typically far less than what you might write on a check each month.
Note, this scenario is just an example and not intended to reflect the current market or forecast for rates, prices, taxes or insurance. All of these factors are subject to continual change.
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