Buyer’s Guide – REQUEST A COPY
There are many great advantages of owning a home, but, frankly, some go unappreciated or under-reported.
For that reason, let’s take a fresh look at 10 of these advantages, including those that may not be on your radar:
1. Tax benefits
As a homeowner, you get to deduct both mortgage interest (up to $1 million) and property taxes from your annual income taxes.
If you’re a new homeowner, you enjoy even more benefits because most of the money you pay on your mortgage goes to interest.
Top earners have the most to gain from these tax advantages. For example, if you’re in the top tax bracket (39.6%), every dollar you pay in mortgage interest saves you 39.6 cents in federal income taxes. You save on state income taxes, too.
The government is subsidizing your purchase.
2. Price appreciation
Houses generally go up in value over time. For example, according to the Price-Shiller Index, the price of existing homes increased 3.4% annually from 1987 to 2009, on average. That annual percentage rate may not seem like a lot, given the popular S&P index of 500 stocks shot up about 30% in 2013. But 3.4% annually over 30 years is a big deal.
After 30 years, a $200,000 house becomes a $545,313 house. That’s a 172.7% increase. A $500,000 house today at an annual appreciation rate of 3.4% interest rate becomes a $1,363,283 house in 2044.
3. Inflation hedge
Housing costs and rents tend to outpace the rate of inflation. Although the Federal Reserve has kept U.S. interest rates artificially low, inflation will break out sooner or later, making it more expensive to make all kinds of purchases, including homes. Ask yourself why so many investors are buying houses in the United States. Housing is a hard asset that protects investment dollars in the long run.
4. Credit builder
Payment history on your debts makes up the largest portion (35%) of your FICOscore, which financial institutions use to determine the amount, rate and terms for loaning you money. If you continue to make your full mortgage payment on time, your FICO should go up. As you reduce your mortgage loan balance, your FICO should incrementally rise as well, as 30% of your FICO is tied to how much you owe. Conversely, late payments will ding your FICO score. For example, a mortgage payment 30 days past due could drop your score of 720 to between 630 and 650. So, pay up and on time and your FICO will increase, making it possible to finance future purchases at favorable rates.
5. Equity builder
Equity is the portion of the house that the owner has already paid off, or the difference between the home’s value and the owner’s total debt to the mortgage lender. So, if you put down 20% and financed the rest through your lender, your starting equity would be 20%. With each loan payment, your home equity would grow and give you more borrowing and purchasing power, as noted below.
6. Borrowing power
More home equity means the chance to borrow more money with a second mortgage in the form of a home equity loan or a home equity line of credit. These loans provide money for funding home improvements, paying medical bills, funding a child’s education or buying consumer goods like a new car, boat, or RV.
7.Move-up power
Home equity also allows the owner to profit more from selling the home and apply that money toward a new house. Equity buildup and appreciation in a first home help in the move-up to a second. According to the National Association of Realtors, first-time home buyers’ median down payment is 3%; repeat buyers, meanwhile, put down 22%.
8. Owning a home can act as a personal finance management tool.
Especially with a fixed-rated amortized mortgage, you know exactly what your payments will be over the life of your loan. Knowing your fixed costs each month, makes it easier to budget, plan, and invest for the future.
9. Easy savings plan
By paying your mortgage every month, you’ve embarked on a forced savings plan. If you want to supercharge that savings plan, simply add an amount that exceeds your combined monthly principal, interest, taxes and insurance payment.
For example, on a $220,000 30-year mortgage with a 4% interest rate, if you were to make an extra house payment each quarter, you’ll save $65,000 in interest and retire your loan 11 years early.
If you make one extra payment each year, 13 payments annually instead of the usual 12, you’ll shorten the term of your mortgage by four years and save $24,000.
10. Capital gains
How do you spell relief? According to the Taxpayer Relief Act of 1997, you spell relief by exempting homeowners from paying any capital gains tax on the first $250,000 of gain if you’re single, and $500,000 of gain if you’re married, provided you have lived in the residence two of the last five years. You can take advantage of this exemption every two years. By contrast, capital gains tax on stocks is 15% if you’re in the 25-35% tax bracket and 20% for the 39.6% tax bracket.
-Applying for a Mortgage-
Monthly Mortgage
Payment Lenders want to make sure you have the ability to pay your loan. As a general rule of thumb, you can figure that your monthly mortgage payment should be equal to or less than 25% of your gross monthly income. This also will vary depending on circumstances.
Amount of Money Needed
You will need money for a down payment and closing costs, plus any move related expenses and maintenance or repair costs for your home.
- Down Payment – Your down payment is a percentage of the property value and is usually from 3 to 20%, or more if you want a lower loan amount. This can vary by the type of mortgage you obtain. Also, if your down payment is less than 20%, you may be required to pay mortgage insurance (PMI or MI)
- Closing Costs – these are settlement costs involved in purchasing your home. They range from 2 to 7% of the property value and include such things as points (a percentage paid for securing a particular interest rate), financing fees, taxes, title insurance, pre-paid and escrow items, and your down payment. You will receive an estimate of these costs prior to closing.
Determining Right Home For You
There are a number of things to consider when choosing the right home and everyone’s priority is different. Where should it be located; neighborhood preference; single or multi-level, number of bedrooms and baths; square footage; yard size; features; quality of schools; age of home; interior or exterior appeal; and most of all, price, because if it’s out of your budget, it can’t be considered.
Make a List
Make a priority list of things important to you. Start with the most important, things you have to have. Then work down the list, putting them in order of most important. After you are done, go up to the top and move down until you get to a place where you can draw a line. Above the line should be all of the items you have to have, and below the line should be all of the things that would be nice to have. This will save you a great deal of time and provide a clear focus for your house hunting.
Working with an Agent
Although the Internet can provide you with homes matching your criteria and it seems easy to drive around, take notes, and set up appointments to view homes for sale, using an agent can be more efficient. They can do the same thing for you, but by working with an agent, you benefit from their knowledge and experience also. Their advice could better help you determine the right home for you and they can assist you with the actual purchase contract.
What to Do When You Find the Right Home
Considering everything has come together, the price is within your budget, and a home has met your demands, it’s time to make an offer. Part of the offer should require a home inspection so you have reliable information about any major problems or repairs you might incur and how they will be handled. If your offer is accepted, the sale proceeds. If your offer is not accepted, the seller may counter-offer with different terms.
What To Know About Credit
There is nothing more important than your credit when it comes to buying a home. The first thing a lender will do is review your credit report. This is a history of money you have borrowed in the past and how you have repaid those debts. It contains a list of debts such as credit cards, car loans, and other loans. It shows any bills that have been referred to a collection agency. It lists other public record information such as liens or bankruptcies. And, it documents inquiries about your creditworthiness and whether you were extended credit or not. Your credit report is constantly updated and most information is deleted after 7 years (10 years for bankruptcies). This credit information then helps generate a computer-derived number that indicates your risk as a payer of debts. This is called your credit score. Your credit history and/or your credit score is used to decide whether your loan is approved and it could be used to determine your interest rate.
If You Don’t Have Credit
If you haven’t established credit, start now. Perhaps apply for a credit card or two, then use them carefully and pay them off each month. Once you’ve done this, you’ve started your credit history. Next, apply for credit on a store purchase such as an appliance, or a TV. Do this even if you have the cash to pay for it. When the first bill comes, use your cash to pay it off in total. You see, buying on credit and paying it off helps your credit better than buying something for cash.
