Have you filed your taxes yet? Are you writing out a check to the IRS, or getting less of a refund than you expected? If you are still renting, you are probably paying more in taxes than you should. In previous posts I’ve gone over other financial advantages of owning your own home – how you gradually build equity in your home as you pay down your mortgage, and how appreciation can build wealth as your property goes up in value over time. But one of the key benefits of owning real estate, here in the Chicago area or throughout the country, is that paying your Home Mortgage puts a little more cash in your pocket through tax deductions.

Strong communities have high rates of home ownership. Home owners take pride in their homes and protect their investments by taking an interest in their schools, local government and the health of their communities. This means they have established roots and have stronger ties to their community and to the nation. One of the strengths of the United States is that it is a nation of home owners. The Government understands this and encourages people to own their own homes. They do this in several ways, but the most important way is through deductible interest.

Real estate is treated differently than nearly every other purchase in this regard. If you were to get an auto loan to buy a new car, the interest is treated strictly as an expense. The same goes with school loans or purchases on your credit cards. It’s different when you get a mortgage. With a mortgage, all your interest, as well as your property tax, and in many cases your mortgage insurance, is tax deductible.

This means that you may be able to buy your own home for the same amount as you’re paying in rent now. Let’s say you’re paying $1,500 in monthly rent, not uncommon in many areas throughout the Chicago area. How much would that payment afford if you were to buy? The truth is, you can afford a much higher monthly payment when you look at it on an after-tax basis. Here’s how this works:

Let’s say you were to buy a $250,000 home with a 5% down payment, on a 30 year fixed mortgage at 6.0% over 30 years. If you are buying in the Chicago area it might look something like this:

$250,000 purchase price / $237,500 mortgage

$1,423 Principal and interest

400 Taxes

50 Insurance

154 Private Mortgage Insurance

$2,027 Total payment

Of your illinois home mortgage payment (principal and interest), $1,187 is the interest portion. Add that to what you paid for the real estate taxes and mortgage insurance you get $1,741. This is the amount that you base the tax deductions on. How much of a benefit you get, depends on your tax bracket. If you are in the 30% tax bracket, it looks like this.

$1,741 Interest + Taxes + mortgage insurance

x30% Tax Bracket

$522 Tax Savings

Now subtract the tax savings from your full mortgage payment.

$2,027 Total monthly payment

-$522 Tax Savings

$1,504 Effective Rent

In other words, a rent payment of $1,500 is equal to a mortgage payment of over $2,000. This is a great benefit for first time home buyers, or anyone buying a home, and when combined with appreciation and equity build up, an example of why real estate ownership is such a great financial investment.

Are you a first time home buyer in the Chicago area? Or are you someone looking for more information on how to save money when buying a home and getting a mortgage? I’ve put together a free 49 page Home Buyer’s Guide which goes into detail on the entire mortgage and home buying process. Just click on the link to download your free copy.

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Tags: , benefits of home ownership, buying a home in the Chicago area, free home buyer's guide, real estate tax savings

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