Buying
Your First House
Owning your own home
has been part of the American Dream for years. The pride of ownership
and sense of belonging somewhere have been strong factors in motivating
over 60% of all households to own their own homes. In addition, there
can be true financial rewards from home ownership. But, not always.
How Much Home To
Consider
Buying and owning a home is expensive. You will need funds for a down
payment (perhaps 20% of the purchase price) and any mortgage closing costs
before you buy. After you buy, you will have monthly mortgage payments,
property taxes and insurance. Then, there are the other expenses like
utilities and maintenance. Finally, if you are like most homeowners, you
will want to furnish it. All of these items cost money.
Deciding how much
to spend for a home can be complex. You probably want as nice of a home
as possible, but you want to be able to afford it. What you can afford
depends on the size of your mortgage, mortgage rates, costs of home ownership,
your other expenses and your income. One rule of thumb to consider is
that the total of your mortgage payment, property taxes and insurance
should be no more than 28% of your household income. Here is a worksheet
and a table of mortgage payments to help with the calculation.
Sample Monthly
Mortgage Payments for a 30 Year Fixed Mortgage
Monthly
Mortgage Payments at different interest rates (30-year fixed rate
mortgage)
|
|
Mortgage
Interest Rate
|
Mortgage
Amounts
|
3.25%
|
3.50%
|
3.75%
|
4%
|
4.5%
|
5%
|
$50,000
|
$217.60
|
$224.52
|
$231.56
|
$238.70
|
$253.34
|
$268.41
|
$75,000
|
$326.40
|
$336.78
|
$347.33
|
$358.06
|
$380.01
|
$402.62
|
$100,000
|
$435.20
|
$449.04
|
$463.12
|
$477.41
|
$506.69
|
$536.82
|
$150,000
|
$652.81
|
$673.57
|
$694.67
|
$716.12
|
$760.03
|
$805.23
|
$200,000
|
$870.41
|
$898.09
|
$926.24
|
$954.83
|
$1,013.37
|
$1,073.64
|
Many financial websites
include mortgage calculators to provide more precise payment levels and
you can also calculate mortgage payments for other lengths of mortgages.
Worksheet
|
Sample
|
Sample
|
|
|
Mortgage
amount
|
$100,000
|
$150,000
|
$
|
$
|
Monthly
payment x 12
|
($477.41
x 12) = $5,729
|
($716.12
x 12) = $8,593
|
|
|
Property
taxes
|
$3,500
|
$3,500
|
|
|
Insurance
|
$1,500
|
$1,500
|
|
|
Total
|
$10,729
|
$13,593
|
|
|
|
|
|
|
|
Household
income
|
$50,000
|
$50,000
|
|
|
Times
28%
|
x.28
|
x.28
|
x.28
|
x.28
|
What
you can afford
|
$14,000
|
$14,000
|
|
|
Difference
|
+$2980
Affordable
|
+$407
Stretching
affordability
|
+
or –
|
+
or –
|
The sample
is based on buying a $175,000 house with a 4% 30 year mortgage. As the
chart shows, this person can probably comfortably afford buying the home
with a much larger down payment. As a practical matter, the person could
probably be comfortable with a mortgage in the $125,000 to $130,000 range.
Tax benefits from
home ownership
Many taxpayers find that the interest on their mortgage and the annual
property taxes (however there is a $10,000 limit on state and local tax
deductions) they pay are large enough to enable them to itemize their
deductions instead of using what is commonly referred to as the standard
deduction. The standard deduction for single filers on their 2018 tax
returns is $12,000 and $24,100 for joint filers. For many homeowners,
their interest and property taxes exceed those amounts. Be sure to keep
track of when you pay your property taxes. Some taxing districts have
due dates close to the end of the year, and you must have paid the tax
before December 31st to get the deduction.
The IRS also allows
you to exclude any gain on selling your house up to $500,000 if you file
a joint income tax return and meet certain requirements. You may want
to investigate these tax advantages further or talk to a tax accountant
to completely understand the tax advantages.
Potential gains
from selling your home
The housing market in many areas of the country is currently suffering.
While that may be bad news for existing owners, it can be very good news
for those buying their first home. When the housing market improves, and
the odds are good that it ultimately will, the value of your home may
rise.
Summary
If you are like millions of others, owning your own home is a primary
financial and lifestyle goal. The pride of home ownership and the financial
rewards are attractive. Just make sure you understand that there can be
some downsides before you make the decision.
|