Know Your Budget!
It is better to plan ahead
than waste your time and energy looking for a house before
you know what you can afford. So your next step is to go over
your finances:
- Compare renting to buying
- Figure out your income, debt and down payment
- Calculate how much you can afford
- Find out about interest rates
- Understand your closing costs
DOES IT PAY TO BUY A HOME OR SIMPLY
RENT?
If you are like most first time buyers,
you are presently renting. It is easy to calculate your cost
it's simply the monthly rent you pay. (Utilities, phone, cable
and other costs can be ignored in this comparison because they'll
be approximately the same whether you rent or buy).
Calculating the cost of homeownership
is much more complicated, because income tax considerations
affect your bottom line. There is also the uncertainty about
how much the value of your home will rise or could possibly
fall in future years.
As a tenant, you may be taking a standard
deduction on your income tax return. This is the time to decide
how that standard deduction compares up against the amount you
would be able to subtract from your income if you, like most
homeowners, itemized your deductions instead.
Once You Itemize, You Can Deduct:
- All real estate taxes on any
property you own.
- Home mortgage interest.
- Your state income taxes.
- Certain moving expenses.
- Personal property taxes if your state has them.
- Charitable contributions.
- Medical and dental expenses that exceed 7.5% of your
income.
At the start of a mortgage repayment
schedule, when the debt hasn't been reduced yet, almost all
of your monthly payment goes toward interest. A bit goes toward
reducing principal (which is the amount borrowed), so that the
next month you are borrowing a little less, and owe a bit less
interest. This allows more of your next payment to go toward
reducing principal. This process is very slow in the beginning
and interest portion remains high for many years.
Between the mortgage interest and the
property tax deductions, you can figure that Uncle Sam is shouldering
part of your monthly mortgage payment - 28% of it, in fact, if
that's your tax bracket. Your state income tax bracket can also
be added to that, before you calculate how much you save on
income tax as a homeowner.
