Question

You are looking to buy a small condo where the combination of monthly mortgage payments and annual property tax bill is much higher than what you were paying previously for renting a similar property. A friend recommends you purchase on the grounds that you can deduct the interest and property tax from your tax payments which will result lower overall payments buying vs renting. Why might that not be the case?

Answer 1

Mortgage Vs Renting

I observe that effective mortgage payments are higher than renting payments. A friend recommends that if the tax benefit on the mortgage is considered than mortgage payments will be lower than renting.

However that might not be the case. First we should understand the difference between the mortgage and renting. Suppose period of renting and mortgage both is 10 years. At the end of the period, you are the effective owner of the house with no charge on the house. After 10 years you can actually sell the house and earn some proceeds. However in case of renting there is no such proceeds. Hence, mortgage the house provides additional benefits at the end of the period. Due to this additional benefit, obviously the payment of mortgage would be higher than the renting payments even after considering tax benefits.