Running the Numbers

I remember the scene very clearly. It was late afternoon on a weekend near the end of April 2004 and my boyfriend and I were sitting at my older sister’s kitchen table in her West Somerville home. She had a pad of paper and a calculator in front of her and she was taking us through, step by step, the basic numbers to consider when buying a home: purchase price, down payment, monthly mortgage payment, taxes, and condo fees. And the concepts we needed to understand to complete the home ownership picture: amortization and tax deductions. At the time we were renters. We wanted to “run the numbers” to see what our monthly costs would be if we were to buy a condo.

Today I take clients through the same basic concepts my sister showed me that April afternoon. Clients want to know what their monthly payments will be if they buy a condo, what these payments will include, what the tax benefits of owning are, and how all these numbers compare to their current situation, whether they’re renting or owning.

Running the Numbers for Buying A Home (Condo Edition)*

* Important caveat here – I am not a tax professional or a lender and you should consult professionals in those fields. This is a Basic Overview only.

A Lovely Condo in Somerville: $400,000

Down Payment: 20% = $80,000

Loan Amount: $320,000 (Purchase Price minus Down Payment = Loan Amount)

Monthly Payments (P+I = Principal plus Interest) = $1718/month (At an interest rate of 5% and a 30-year loan)

Taxes + Condo Fees = $443.50/month

To calculate the monthly taxes I took the assessed value of the condo (for this example I used the purchase price) and multiplied that by the city’s tax rate of $12.30/$1000 = $4920/year, then subtracted the residential exemption of $1697.52 = $3222/year or $268.50/month.

Monthly condo fee = $175. (Depending on the building, condo fees generally include water/sewer, master insurance and reserve. But I will write a whole other post on condo fees soon.)

Monthly Payments (P+I) + Taxes + Condo Fees = $2161.50/month

Tax Benefits

Still with me? This is the fun part. When you own a home the interest you pay on your loan and the amount you pay in real estate taxes are tax deductible. These deductions result in tax benefits for the homeowner. Here’s how it works:

If you’re already familiar with an amortization schedule, fantastic. If this is new to you, welcome! Here’s an Example Amortization Schedule for our scenario. This table tells us that at the beginning of a loan the bulk of your monthly payment goes towards interest. As you pay down your loan a greater portion of the loan payment goes towards principal.

To calculate your tax savings, take your income tax rate (let’s say 30%) and multiply it by the amounts you pay in interest and real estate taxes:

In our example, for the first year of your mortgage you’ll pay approximately $1300 of your monthly payment of $1718 monthly towards interest (see the amortization schedule above). Every year you will receive an actual accounting from your lender with the total amount of interest paid.

Tax Benefit from Mortgage Interest: $1300 x .3 = $390/month

Tax Benefit from Real Estate Taxes: $268.50/month x .3 = $80.55/month

Total Monthly Tax Benefits: $390 + $80.55 = $470.55

Effective Monthly Payments: Principal + Interest + Taxes + Condo Fees ($2161.50) minus Tax Benefits ($470.55) = $1690.95

Exciting, eh? In this scenario, the effective monthly payment for a $400,000 condo with 20% down, after figuring in the tax benefits, is $1690.95. I love running the numbers with clients because it helps them understand some of the main costs and benefits of home ownership. And I believe that the more informed my clients are – about the market, about the costs and benefits of owning a home – the the better decisions they can make for themselves.