Time to Buy a House or Still Rent?

Remember Income Tax Benefits

It's a no-brainer: rent the place out for a few years to give it more time to appreciate. I rented from a woman in that situation once. There are two disadvantages to that plan. One, being a landlord is often a nasty experience. Two, your money will be tied up in the property, making it harder to buy another place for yourself. On the other hand, some people who were forced into this situation ended up becoming mini real estate barons because they scrimped and managed to keep their rental place and buy a place for themselves -- and then buy more.

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But back to the present. To figure out what size monthly housing payment you can afford, you could use an online calculator, but I think many of them are designed by people who want to sell mortgages and may overstate what you can afford. So instead (or in addition), I say start with your rent. Let's assume you make your monthly rent payments without any strain. You'll actually be able to afford a higher payment when you own because of the income tax benefits.

I'm going to give you a grossly over-simplified formula that will give you a rough idea. Let's say you pay $1,000 in rent each month and your top income tax rate is 20 percent. Take your rent and divide it by the other 80 percent to determine an affordable monthly housing payment: 1,000 divided by 0.80 equals $1,250. Or, your rent divided by the percentage of your income that remains after taxes = X.

That's about how much you can afford to pay for housing when you own the place. It's not a perfect formula because you're not allowed to deduct your entire mortgage payment from your taxes. Only the interest is deductible. Then again, in the beginning of a mortgage loan, most of your payment does go to interest, so it's a reasonable calculation.

Now remember, that amount has to cover the mortgage itself plus property taxes, homeowner's insurance and homeowner's association fees, if any. You should also set aside money for maintenance because there won't be a landlord to fix things anymore. Keep in mind your utility bills could also be higher if you're buying a bigger place than you rent. (You can find out how much the home's monthly power bills are by calling the power company.)