Illinois Mortgage Rates and News

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.

Illinois Mortgage Rates and News

If you are a first time home buyer thinking of buying a home here in the Chicago area, you are probably asking yourself, why would anyone want to buy a home in today’s market? Fear is in the air and it is a scary time to buy. The news is filled with talk of foreclosures and declining markets. Although the Chicago area has remained stable, real estate prices have fallen sharply in many areas of the country. If you buy a home now, how do you know that prices won’t fall lower? The truth is, you don’t. But if you have good reasons to buy (You need more space, growing family, moving up in your job … whatever, you know your reasons), and you are planning for the long term, now could be a great time to buy a home here in the Chicago area.

Mortgage rates are low now and you have your choice of homes to buy. But there are some crucial benefits of buying real estate that go beyond the current market conditions. In an earlier post I talked about the first financial benefit of owning a home, how you gradually build equity by paying down your loan. A more dramatic benefit of owning a home is property appreciation. Over the years, home prices have risen steadily in the Chicago area and throughout the country. Even now, with the market slower, it still costs tens of thousands of dollars more to buy a home in the Chicago area than it did just a few years ago. Home prices could fall lower, but if you look at long term trends, real estate usually goes up and chances are that homes in the Chicago area will cost a lot more 5 years from now than they do now.

So how does appreciation work for you? Here’s an example. If you buy a home for $300,000, and the market appreciates, that is the property values increase, by 3% per year (Appreciation doesn’t move in a straight line. It may be 0 one year and 5% the next.), at the end of 5 years your home will be worth over $347,000. At the end of 10 years it would be worth over $400,000.

In this example, you have increased your equity by nearly $100,000 while living in your own home. There’s no guarantee of what home values will be in the future, but this is what has happened throughout the Chicago area in the past.

Let’s take this a step further. Let’s say you bought this same home for $300,000, but that you took out a mortgage for 95% of the purchase price, or $285,000. Let’s say that the mortgage was a 30 year fixed rate with an interest rate of 6.0%. Because your mortgage principal balance goes down over time, at the end of the tenth year your mortgage balance will be paid down to $238,500. If, through appreciation, the value has grown to $400,000, your equity is now worth over $165,000. Not bad for an investment of only $15,000.

Appreciation is the reason so many people are able to move up to a larger house. Having the extra money to use as a down payment, gives you the buying power to buy a larger home for your growing family, or maybe the chance to move into your dream home. Appreciation is one of the key benefits of homeownership, but the key here is that you need to allow time for it to work.

The market has slowed down recently and those who bought a home in the last year or two, haven’t seen much of any appreciation, and in some areas the prices have fallen. Time is the factor here. Real estate isn’t an investment you jump in and jump out of. It takes time to see all the benefits and when you buy a home you should plan on keeping the home for several years, minimum.

With prices down, this could be an opportunity. Historically, the real estate market has always moved higher. It may take some time before prices start rising again, but there are always new buyers coming into the market, through birth and immigration. The demographic push means that real estate prices will rise over time.

But owning your own home is a great investment even if prices stay flat. Tax advantages from owning your own home means the government is helping you to pay for your mortgage. I’ll go over this in a future post.

Illinois Mortgage Rates and News

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First Time Home Buyers Loan : Tax Benefits Make Real Estate a Smart Investment for Chicago Area First Time Home Buyers