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| The Basics | The 3 worst reasons to buy a house
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I need the tax deduction
The notion that you should buy a house just for the deduction has always been faulty, but just got more suspect with the latest proposals to cap the mortgage interest write off. (See "At risk: your home-mortgage deduction.")
If these proposals succeed in becoming law, the tax benefits of mortgages in expensive cities could decline dramatically. Someone with a $500,000, 30-year fixed mortgage today, for example, now pays about $30,000 in interest the first year and generates a tax break of nearly $7,500, assuming the homeowner's in the 25% bracket. If deductible loans are capped at $300,000 and homeowners are given a 15% tax credit instead of a full deduction, the tax break associated with the above mortgage would shrivel to just $2,685.
Even if the law doesn't change, buying a house just for the mortgage break would be like giving somebody a buck just to get 35 cents or less in return.
That's because your write-off is limited to your tax bracket. If youre in the top federal tax bracket, every dollar you pay in mortgage interest only saves you 35 cents in taxes. Most people get even less, since they're in the 25% or lower tax brackets.
Dont misunderstand -- the tax break is nice, and you need somewhere to live. But you should make sure you can really afford to own a home before you take the plunge.
Remember that many of the real costs of owning a home arent deductible. Uncle Sam wont give you a break for insurance, repairs or maintenance, for example -- and those costs can really add up.
Most homeowners should plan to spend at least 1% of their homes purchase price each year on maintenance and repairs, says finance expert Eric Tyson -- and more if they plan to hire someone else to do all the work. Tyson, co-author of Home Buying for Dummies, recommends setting aside some money each month in an emergency fund. You may not spend the whole amount every year, but sooner or later a big expense will come along -- a new furnace or roof, for instance -- that will consume several years worth of savings.
If you fail to maintain your home properly, youll pay even more when it comes time to sell. Many buyers wont even bid on a property that shows significant neglect. Even in hot markets, buyers are likely to ask for expensive concessions to pay for the repairs you should have been doing all along.
The best advice on the issue of whether to buy vs. rent remains the time-tested version: Buy a home when the timings right for you, when you can swing all the costs and when you plan to stay put awhile. That way you can ride out any downturns in the market and benefit from any appreciation while enjoying a nice and affordable home in the meantime.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
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