home ownership cost

• 1. Cost to OwnGuide to the real cost ofowning your homeHOME OWNERSHIP COST

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CosttoOwnTheOCHousingNewsownershipcostcalculationsforfamilyhomes.................................................................3Apoint-in-timeanalysis........................................................................................................................................................................3AskingPrice................................................................................................................................................................................................3DownPayment..........................................................................................................................................................................................3MortgageInterestRate..........................................................................................................................................................................4NumberofYears.......................................................................................................................................................................................4Mortgage......................................................................................................................................................................................................4IncomeRequirement..............................................................................................................................................................................5MonthlyMortgagePayment................................................................................................................................................................5PropertyTax...............................................................................................................................................................................................5MelloRoos&SpecialTaxes..................................................................................................................................................................5HomeownersInsurance........................................................................................................................................................................6HOADues.....................................................................................................................................................................................................6FHAMortgageInsurance.......................................................................................................................................................................6MonthlyCashOutlays.............................................................................................................................................................................6TaxSavings..................................................................................................................................................................................................6PrincipalAmortization...........................................................................................................................................................................7OpportunityCost......................................................................................................................................................................................7MaintenanceandReserves...................................................................................................................................................................8MonthlyOwnershipCost.......................................................................................................................................................................8ComparableRental..................................................................................................................................................................................8AddedCostor(Savings)........................................................................................................................................................................8FurnishingandMoveIn.........................................................................................................................................................................9ClosingCosts...............................................................................................................................................................................................9DownPayment..........................................................................................................................................................................................9TotalCashCosts........................................................................................................................................................................................9EmergencyCashReserves.................................................................................................................................................................10TotalSavingsNeeded...........................................................................................................................................................................10HowMuchaHouseReallyCosts.....................................................................................................................................11MortgagePayment................................................................................................................................................................................11PropertyTaxes.......................................................................................................................................................................................12HomeownersInsurance.....................................................................................................................................................................13PrivateMortgageInsurance..............................................................................................................................................................13SpecialTaxesandLevies....................................................................................................................................................................14HomeownerAssociationDuesandFees.....................................................................................................................................14MaintenanceandReplacementReserves...................................................................................................................................15TaxSavings...............................................................................................................................................................................................15HiddenSavings.......................................................................................................................................................................................16OpportunityCost...................................................................................................................................................................................16OwnershipCostMath..........................................................................................................................................................................17info@ochousingnews.com949.769.1599 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CosttoOwnTheOCHousingNewsownershipcostcalculationsforfamilyhomesBelowisaconcisedescriptionofeachlineitemdisplayedontheMLSpropertydetails,whytheitemisimportant,andhowitscalculated.APOINT-IN-TIMEANALYSISTodayisreality;tomorrowisafantasy.Theownershipcostcalculationisasnapshotofthecostofownershipatthetimeoffirstpayment.Itmakesnoprojectionsforfuturechangessuchashomepriceappreciation.Thisanalysispurposelydoesnotprojectfuturechangesfortworeasons:First,thecostsatthetimeoffirstpaymentareconcreteandknowable.Itrequiresfewerassumptionsandnocrystalball.Second,mostpeoplewhoestimatefutureappreciationwildlyoverestimate.Verysmallchangesinratesofappreciationmakeverylargedifferencesover10ormoreyears.Overestimatingappreciationalwaysmakesowningapropertylookverydesirablefinancially.Itsamistakemanypeoplemadewhoboughtatthepeakofthehousingbubble.ASKINGPRICEThisisthecurrentaskingpriceontheMLS.DOWNPAYMENTAconventionalloanrequiresadownpaymentthatis20%ofthepurchaseprice.Downpaymentswilllessthan20%downrequireprivatemortgageinsurance,apolicypaidbytheborrowerthatprotectsthelenderfromloss.FHAdownpaymentsaregenerally3.5%ofthepurchaseprice.Thedownpaymentiscalculatedbymultiplyingtheaskingpriceby20%foraconventionalloanand3.5%[email protected] 4. CosttoOwnMORTGAGEINTERESTRATEMortgageInterestratesaresetbylenderscompetingtoofferloanstoborrowerswhoarebuyingorrefinancingrealestate.MortgageInterestRatesarequotedonmanywebsites,suchasBankrate.com.Iftheloanisovertheconforminglimit,ajumbopremiumof0.35%isaddedtothemarketrate.TheOCHousingNewscalculationsusestheinterestrateprevailingwhenthelistingfirstcameonthemarket.Theinterestrateisperiodicallyupdated.Themortgageinterestrateshownisnotaquote.Itisprovidedforestimatingpaymentsandcostofownership.NUMBEROFYEARSThetermsofaloangenerallyrequirerepaymentovertime.Amortgagewithafixedrepaymentscheduleiscalledanamortizingmortgage,andtheperiodoftimeoverwhichthemortgageamortizesiscalleditsterm.Thetermofmortgagesisgenerally30years,but15yeartermsarealsocommon,andlendersofferotherschedules.TheOCHNcalculationsassumea30-yearfixed-rateamortizingmortgagebecauseitisastablebalancebetweenlowpaymentsandreasonablerepaymentperiod,anditsthemostcommonformofhomefinancing.MORTGAGEThemortgagebalanceforaconventionalmortgageistheaskingpriceminusthedownpayment.Themortgageis80%ofthepurchasepriceinthesecalculations,butbuyersexecutingamove-upsalemayhavelargerdownpaymentsandsmallermortgagebalances.TheFHAmortgageisnotassimpletocalculateasaconventionalmortgagebecausetheFHAchargesa1.75%upfrontfeethatgetsrolledintothemortgage.Theamountborrowedis96.5%ofthepurchaseprice(100%3.5%)plusthe1.75%charge,foratotalmortgagebalanceof98.25%ofthepurchaseprice(96.5%+1.75%).ThisiswhytheFHAmortgageplusthedownpaymentdoesnotequaltheaskingprice.info@ochousingnews.com949.769.1599Page4of17 5. CosttoOwnINCOMEREQUIREMENTTheincomerequirementisbasedonstandardssetbyFannieMae,FreddieMac,andtheFederalHousingAdministration(GSEsandFHA).Themonthlycashoutlays(describedlater)multipliedby12givesayearlypaymentburden.Theyearlypaymentburdenmustnotexceed31%ofaborrowersincomeundermostcircumstances(FHAoftenmakesexceptions).Theformulaisasfollows:IncomeRequirement=MonthlyCashOutlaysX12/0.31MONTHLYMORTGAGEPAYMENTThemonthlymortgagepaymentisdeterminedbylendersusingaformulaoutlinedbelow.Itsbasedonthemortgageamount,mortgageinterestrate,andloanterm(numberofyears)asdescribedabove.Thefollowingformulaisusedtocalculatethefixedmonthlypayment(P)requiredtofullyamortizealoanofLdollarsoveratermofnmonthsatamonthlyinterestrateofc.[Ifthequotedrateis6%,forexample,cis.06/12or.005].P=L[c(1+c)n]/[(1+c)n-1]PROPERTYTAXProposition13setspropertytaxesinCaliforniaaresetat1%ofpurchaseprice(assumedaskingprice).MELLOROOS&SPECIALTAXESMelloRoosareanexampleofaspecialtaxlevyputonthepropertybythedeveloperinCalifornia.ThelocalAssessorsofficehasthisinformationonline,butitisnotorganizedinawaypermittingeasydownload,soitmustbeestimated.NoteverydevelopercreatesaMelloRoosdistrict,sosomepropertiesdevelopedsince1985mayhavenoMelloRoos.Forthoseproperties,thecostofownershipcalculationswilloverstatethetruecost.ThecalculationsontheOCHNestimateasfollows:[email protected] 6. CosttoOwnIftheyearofconstructionis2002orlater,MelloRoos=PropertyCostBasis0.04.Iftheyearofconstructionis1994orlaterbutearlierthan2002,MelloRoos=PropertyCostBasis0.02.Iftheyearofconstructionis1985orlaterbutearlierthan1994,MelloRoos=PropertyCostBasis0.01.HOMEOWNERSINSURANCEHomeownersinsuranceratesvarywidely,butthestandardestimationis$25foreach$100,000inhomevalue.HOADUESTheHOAduesistakenstraightfromtheMLS.Sometimesagentsinputthisinformationincorrectly,butforthemostpart,thenumbersareaccurate.FHAMORTGAGEINSURANCEConventionalmortgageswith20%downpaynoprivatemortgageinsurance.FHAinsuresmortgageswithaslittleas3.5%down,andthecostofthisinsuranceis1.3%percentageoftheloanbalanceitshigherthanpropertytaxesinCalifornia.MONTHLYCASHOUTLAYSThemonthlycashoutlaysalsoknownasPITIisastandardlendercalculationofhousingcosts.Itisthesumofthecostslistedabove:payment,propertytax,MelloRoos,Insurance,HOAs,andmortgageinsurance.TAXSAVINGSThetaxsavingsisthemostcomplicatedofthecalculations.Basedontheincomerequirement,theborrowersincomeiscomparedtobothFederalandCaliforniataxtablestodeterminethemarginaltaxratesforbothentities.Todeterminethemaximumpotentialtaxsavings,themarginaltaxrate(bothFederalandState)[email protected] 7. CosttoOwnthesumofmortgageinterest,propertytaxes,andmortgageinsurance(thosearedeductibleexpenses).However,tocalculatetheactualtaxsavingsthemarginaltaxratemustbemultipliedbythestandarddeduction,andthisnumbermustbesubtractedfromthemaximumpotentialtaxsavings.Thisadjustmentisnecessarybecauseinordertoclaimthededuction,ataxfilermustitemize,andthisrequiressurrenderingthestandarddeduction.ThiscalculationissocomplexbecauseitmustberepeatedforbothStateandFederaltaxes,andbothhavedifferenttaxrates,differentincomethresholds,anddifferentstandarddeductions.PRINCIPALAMORTIZATIONSincepartofthemortgagepaymentisprincipal,andsincethisiseffectivelyaforcedsavingsaccount,theamountofprincipalamortizationmustbebackedoutbecauseitisnotatruecostofownership.Thepaymentiscalculatedbytheformuladetailedabove.Theinterestonthedebtistheoutstandingloanbalancemultipliedbytheinterestrateanddividedby12.Theinterestissubtractedfromthepaymenttoascertainprincipalamortization.Overtime,principalamortizationgrowsandmortgageinterestdeclines.However,sincethisisapoint-in-timeanalysis,onlytheamortizationofthefirstpaymentiscounted.OPPORTUNITYCOSTOpportunitycostisperhapstheleastunderstoodoftheadjustmentstoownershipcost.Whenadownpaymentisappliedtoahomepurchase,thatmoneycamefromsomewhere.Ifthebuyerwouldhavechosentorent,thatmoneycouldhavebeeninvestedinanynumberofsafeinvestmentalternatives.Thelossofthisinvestmentincomeistheopportunitycost.Thecalculationhereintakesthemortgageinterestrate,dividesitby3,thenadds1%toit.Thisgenerallyapproximatestheyieldonmedium-termCDs,money-marketaccounts,orTreasuries.Forexample,at4.5%interestrates,theopportunitycostwouldbe2.5%(4.5%/3+1%)[email protected] 8. CosttoOwnMAINTENANCEANDRESERVESRealpropertyrequiresroutinemaintenance.Further,overtime,moreexpensiveitemssuchasroofsorexteriorpaintneedreplacement.Budgetingfortheirregularexpensesofroutinemaintenanceandtheslowdepletionofwearandtearrequiresestablishingamonthlyallowanceformaintenanceandreplacementreserves.Theformulausedhereisaskingpricetimesthree-tenthsofonepercentdividedbytwelve(0.003/12).MONTHLYOWNERSHIPCOSTThemonthlyownershipcostisthemonthlycashoutlaysadjustedfortaxsavings,principalamortization,opportunitycost,andmaintenancereserves.COMPARABLERENTALComparablerentalratesaredeterminedbyanadvancedalgorithmforselectingcomparableproperties.WhenIwasactivelyflippingpropertiesinLasVegas,Ievaluatedbothresaleandrentalcompsonover1,500properties.IdevelopedaseriesofstepstograduallyloosenthevariousparametersuntilIobtainedasufficientnumberofcomparablepropertiestomakeareasonableestimateofvalue.Thesealgorithmsareproprietary.Asthisisanautomatedanalysis,thereisadegreeoferrorintheseestimates,andtheactualcomparablerentalratemaybesignificantlyhigherorlowerthantherateshown.ADDEDCOSTOR(SAVINGS)Thesavingsorlossisthemonthlyownershipcostminusthecostofacomparablerental.Ifthisnumberisnegative(inparenthesis),thenthepropertycostslesstoownthattorent,whichisagoodsign.Ifthenumberispositive,itcostsmoretoownthantorent.info@ochousingnews.com949.769.1599Page8of17 9. CosttoOwnFURNISHINGANDMOVEINFurnishingandmoveincostsvaryconsiderablydependingonthetastesofthebuyer.Therearegenerallyfixedcostsformoversandotherserviceproviders,andvariablecostsforfurnishings.Ingeneral,peoplewillfurnishahouseinproportiontoitscost.Thefollowingformulaisalow-costestimate;mostpeoplewhenmovingintoafamilyhomewillspendmuchmore.Theformulausedheretoestimateis1%oftheaskingpriceplus$3,500.CLOSINGCOSTSThebuyerandselleroftensplitcertaincostsatclosing,andsomecostsareentirelytheresponsibilityofthebuyer.Whatspaidbythebuyerandwhatisasplitcostvariesbylocalcustom.Forfinancedpurchases,thebuyermustpayclosingcostsincludingloanoriginationfeesandotherlendercosts.Theformulausedheretoestimateis1%oftheaskingpriceplus$3,500.DOWNPAYMENTThedownpaymentiscalculatedabove.Itsrepeatedherebecauseitspartofthecalculationoftotalcashcosts.TOTALCASHCOSTSThetotalcashcostsistheamountofmoneyabuyermusthaveavailabletocompletethesaleincludingfurnishingandmovein,closingcosts,andthedownpayment.Peopleoftenforgetaboutclosingcostsandfurnishingcostandgointodebtshortlyafterthesaletocoverthesecosts.info@ochousingnews.com949.769.1599Page9of17 10. CosttoOwnEMERGENCYCASHRESERVESThoughnotanactualcostofacquiringtheproperty,financialadvisorsalwaysrecommendhavingsufficientcashreservestocoverexpensesincaseofanemergency.Further,lendersoftenrequireliquidcashreservesinadditiontothedownpaymentasaconditiontofunding.Mostborrowersdonotreservemuchifanythingwhenbuyingahome.Almostnonehaveanadditionalsix-monthsincomelikemostfinancialadvisorsrecommend.Thecalculationhereinonlyestimatesthreemonthsofincomebasedontheincomerequirementgeneratedabove.TOTALSAVINGSNEEDEDThetotalamountofsavingsnecessarytohaveastress-freepurchaseisthetotalcashcostsplussufficientemergencyreserves.info@ochousingnews.com949.769.1599Page10of17 11. CosttoOwnHowMuchaHouseReallyCostsIfyouareleaningtowardowning,itsimportanttoknowhowmuchthepropertywillreallycosttoown.Mostpeoplemakeemotionaldecisionsaboutownershipwithoutacarefulexaminationofthecosts.Anyanalysisisusuallyslantedtowardjustifyingadecisiontheyalreadymade.Therefore,thecoststendtobeunderestimatedormissedentirely,andthebenefitsareoftenexaggerated.Gettingthisrightcanmakethedifferencebetweenahappyperiodofownershipandasoul-draininglossofincomeoreventhehouseitself.Ausefulwaytolookatthetotalcostofhousingistoevaluatethemonthlycostofownership.Anownershipcostisanyexpenditurerequiredforthepossessionofproperty.Aworkingdefinitionisimportantbecausetherearemanyhiddenorforgottencostspeopleoverlook.Thesecostsarebornebyownersandnotbyrenters.Thereare7coststoowningahouse.Althoughsomeofthesecostsarenotpaidonamonthlybasis,theycanbeevaluatedonamonthlybasiswithsimplemath.Thesecostsare: MortgagePayment PropertyTaxes HomeownersInsurance PrivateMortgageInsurance SpecialTaxesandLevies HomeownersAssociationDuesorFees MaintenanceandReplacementReservesMORTGAGEPAYMENTThemortgagepaymentisthefirstandmostobviouspaymentbecauseitisthelargest.Itisalsoanareawherepeopletakeriskstoreducethecostofhousing.Itwasthemanipulationofmortgagepaymentsthatwasthefocusofthelendingindustryinnovationthatinflatedthehousingbubble.Therelationshipbetweenpaymentandloanamountisthemostimportantdeterminantofhousingprices.Thisrelationshipchangeswithloantermssuchastheinterestrate,butitisalsostronglyinfluencedbythetypeofamortization,ifany.Amortizingloans,loansthatrequireprincipalrepaymentineachmonthlypayment,financethesmallestamount.Interest-onlyloantermsfinancealargeramountthanamortizingloansbecausenoneofthepaymentisgoingtowardprincipal.Negativelyinfo@ochousingnews.com949.769.1599Page11of17 12. CosttoOwnamortizingloansfinancethelargestamountbecausethemonthlypaymentdoesnotcovertheactualinterestexpense.Interest-onlyandnegativelyamortizingloansprovedsounstableduringthehousingbubble,theywerewithdrawnfromthemortgagemarket.Byfarthebestwaytodetermineaffordabilityofafinancedhomepurchaseistocomparethecostofownershiptothecostofarental.Mostmarketstradenearrentalparitylevelsbecausefinanciallywhicheverislowerisgenerallythebetterdeal.Asrentsbecomelessthanthecostofownership,manychosetorent,andwhenthecostofownershipfallsbelowthecostofarental,peoplechosetobuy.PROPERTYTAXESPropertytaxeshavelongbeenasourceoflocalgovernmenttaxrevenues.Realpropertycannotbemovedoutofagovernment'sjurisdiction,andvaluescanbeestimatedbyanappraisal,soitisaconvenientitemtotax.Inmoststates,localgovernmentsaddupthecostofrunningthegovernmentanddividebythetotalpropertyvalueinthejurisdictiontoestablishamillagetaxrate.CaliforniaisforcedtodothingsdifferentlybyProposition13,whicheffectivelylimitstheappraisedvalueandtotaltaxrevenuefromrealproperty.Localgovernmentsareforcedtofindrevenuefromothersources.Proposition13limitsthetaxrateto1%ofpurchasepricewithasmallinflationmultiplierallowingyearlyincreases.InCalifornia,thefirsthalfofregularsecuredpropertytaxbillsaredueNovember1st,anddelinquentafterDecember10th;thesecondhalfaredueFebruary1st,anddelinquentafterApril10theachyear.IfthedelinquentdatefallsonaSaturday,Sunday,orgovernmentholiday,thentheduedateisthefollowingbusinessday.Oftenthelenderwillcompeltheborrowertoincludeextramoneyinthemonthlypaymenttocoverpropertytaxes,homeownersinsurance,andprivatemortgageinsurance,andthesebillswillbepaidbythelenderwhentheycomeinfo@ochousingnews.com949.769.1599Page12of17 13. CosttoOwndue.Ifthesepaymentsarenotescrowedbythelender,thentheborrowerwillneedtomakethesepayments.Thetotalyearlypropertytaxbillcanbedividedby12toobtainthemonthlycost.HOMEOWNERSINSURANCEHomeownersinsuranceisalmostalwaysrequiredbyalendertoinsurethecollateralfortheloan.Evenifthereisnolenderinvolved,itisalwaysagoodideatocarryhomeownersinsurance.Theriskoflossfromdamagetothehousecanbeafinancialcatastrophewithouttheproperinsurance.Astandardpolicyinsuresthehomeitselfandthethingsyoukeepinit.Homeownersinsuranceisapackagepolicy.Thismeansthatitcoversbothdamagetoyourpropertyandyourliabilityorlegalresponsibilityforanyinjuriesandpropertydamageyouormembersofyourfamilycausetootherpeople.Thisincludesdamagecausedbyhouseholdpets.Damagecausedbymostdisastersiscoveredbutthereareexceptions.Themostsignificantaredamagecausedbyfloods,earthquakesandpoormaintenance.Youmustbuytwoseparatepoliciesforfloodandearthquakecoverage.Maintenance-relatedproblemsarethehomeowners'responsibility.PRIVATEMORTGAGEINSURANCEMortgagesagainstrealpropertytakepriorityonafirstrecorded,firstpaidbasis.Thisisknownastheirlienposition.Thisbecomesveryimportantininstancesofforeclosure.Thefirstmortgageholdergetspaidinfullbeforethesecondmortgageholdergetspaidandsoonthroughthechainofmortgagesonaproperty.Inaforeclosuresituation,subordinateloansareoftencompletelywipedout,andifthelossisgreatenough,thefirstmortgagemaybeimperiled.Becauseofthisfact,ifthepurchasemoneymortgage(1stlienposition)exceeds80%ofthevalueofthehome,thelenderwillrequiretheborrowertopurchaseaninsurancepolicytoprotectthelenderineventofloss.Thispolicyisofnouseorbenefittotheborrowerasitinsuresthelenderagainstloss.Itissimplyanaddedcostofownership.Manyofthepurchasetransactionsduringthebubblerallyhadan80%purchasemoneymortgageandapiggybackloanofupto20%tocovertheremainingcost.Theseloanpairsareoftenreferredtoinfo@ochousingnews.com949.769.1599Page13of17 14. CosttoOwnas80/20loans,andtheywereusedprimarilytoavoidprivatemortgageinsurance.Therewereverycommonduringthebubble.Intheaftermathofthehousingcrash,manymortgageinsurerswentoutofbusinessduetoexcessivelosses.Further,theinsurancefundsmaintainedbytheFHAbecamedangerouslyimperiled.Asaresult,privatemortgageinsurancecostsrosesignificantly.Sinceprivatemortgageinsuranceissimplyanadd-oncostofpayingthemortgage,itcanbelookedonasanadditionalinterestcharge.AnFHAloanmayhavea3.5%interestrate,butwhentheFHAinsurancepremiumsareadded,theeffectiveinterestraterisesto5%ormore.Avoidingthecostofprivatemortgageinsuranceisastrongfinancialrewardtothosewhocanput20%down.SPECIALTAXESANDLEVIESSeveralareashavespecialtaxingdistrictsthatincreasethetaxburdenbeyondthenormalpropertytaxbill.Manystateshaveprovisionswhichallowsupplementalpropertytaxsituations.TheStateofCaliforniahasMelloRoosfees.AMello-RoosDistrictisanareawhereaspecialtaxisimposedonthoserealpropertyownerswithinaCommunityFacilitiesDistrict.Thisdistrictisestablishedtoobtainpublicfinancingthroughthesaleofbondsforthepurposeoffinancingcertainpublicimprovementsandservices.Theseservicesmayincludestreets,water,sewageanddrainage,electricity,infrastructure,schools,parksandpoliceprotectiontonewlydevelopingareas.Thetaxespaidareusedtomakethepaymentsofprincipalandinterestonthebonds.HOMEOWNERASSOCIATIONDUESANDFEESManymodernplannedcommunitieshavehomeownersassociationsformedtomaintainprivatelyownedfacilitiesheldfortheexclusiveuseofcommunityresidents.TheseHOAsbilltheownersmonthlytoprovidetheseservices.Theyhaveforeclosurepowersifthebillsarenotpaid.Itisgiventheauthoritytoenforcethecovenants,conditions,andrestrictions(CC&Rs)andtomanagethecommonamenitiesofthedevelopment.Itallowsthedevelopertolegallyexitresponsibilityofthecommunitytypicallybytransferringownershipoftheassociationtotheinfo@ochousingnews.com949.769.1599Page14of17 15. CosttoOwnhomeownersaftersellingoffapredeterminednumberoflots.Mosthomeowners'associationsarenon-profitcorporations,andaresubjecttostatestatutesthatgovernnon-profitcorporationsandhomeowners'associations.MAINTENANCEANDREPLACEMENTRESERVESAnoften-overlookedcostofownershipisthecostofroutinemaintenanceandthefundingofreservesformajorrepairs.Forexample,acompositeshingleroofmustbereplacedevery20-25years.Itmaytake$100amonthsetasidefor20yearstofundthisreplacementcost.Also,condominiumassociationsoftenlevyspecialassessmentstoundertakerequiredworkforwhichthereservesareinsufficient.Intherealworld,mostpeopledonotsetasidemoneyfortheseitems,whichisamistake.MostwillattempttoobtainaHomeEquityLineofCredit(HELOC)tofundtherepairswhentheyarenecessary.Ofcoursethisassumesapropertyhasappreciatedandsuchfinancingwillbemadeavailable.TAXSAVINGSTherearetwoothervariablespeopleoftenconsiderwhenevaluatingthecostofownershipthatisnotincludedinthepriorlist:incometaxsavingsandlostdownpaymentinterest.Whenaborrowertakesoutahomeloan,theinterestistaxdeductibleuptoacertainamount.Forborrowersinthehighestmarginaltaxbracket,thesavingscanbesignificant,andthiscanmakeadramaticdifferenceinthetruecostofownership.However,thisbenefitdiminishesovertimeastheloanispaidoffandtheinterestdecreases.Plus,contrarytopopularbelief,itisnevergoodfinancialplanningtospend$100tosave$25intaxes.Also,thesebenefitsarealmostuniversallyoverestimatedbypeopleconsideringahomepurchase.ArenterconsideringhomeownershipwillneedtoremembertheywillbegivingupthestandarddeductionwhentheyitemizetoobtaintheHomeMortgageInterestDeduction(HMID).A"marriedfilingjointly"taxpayerwillforgoa$10,700deductionin2007.ThisreducesthenetimpactoftheHMID.Anecdotally,eventhoseinthehighesttaxbracketsusuallydonotgetmorethana25%[email protected] 16. CosttoOwnHIDDENSAVINGSThisistheforgottenbenefitofaconventionallyamortizingloan:forcedsavings.Mostpeoplearenotgoodatsaving.Thegovernmentrecognizedthisyearsagowhentheystartedtakingmoneyoutofpeoplessalariestopayincometaxesbecausetheyknewpeoplewouldnotdoitontheirown.Peoplewhobecomehomeownersduringtheirlifetimesoftenhavetheequityintheirhomeastheironlysourceofretirementsavingsotherthansocialsecurity.Toaccuratelycalculatethecostofownership,thishiddensavingsamountneedstobedeductedfromthetotalcostofownershipbecausethismoneywillgenerallycomebacktotheborroweratthetimeofsale.SincetaxpayersintheUnitedStatesgetacapitalgainsexemptionupto$250,000,thissavingsamountdoesnotneedtobeadjustedfortaxes.OPPORTUNITYCOSTUnless100%financingisutilized,acashdownpaymentwillgenerallybewithdrawnfromaninterestbearingaccounttopurchaseahouse.Themonthlyinterestthatwouldhaveaccruedifthedownpaymentmoneywasstillinthebankisacostofownership.Thisisperhapsthemostoverlookedownershipcost.Forinstance,ifyouareputting20%downona$500,000property,youwillbetaking$100,000fromabankaccountwhereitwouldhaveearnedareturn.Ifsomeonechoosestorentratherthanbuy,theywouldearnthisinterestincome.Ofcourse,thisearnedincomeisalsotaxed,so75%ofthisnumberisthenetopportunitycostofadownpayment.info@ochousingnews.com949.769.1599Page16of17 17. CosttoOwnOWNERSHIPCOSTMATHinfo@ochousingnews.com949.769.1599Page17of17