Know Your Budget
There's no
point wasting time and energy house-hunting before you
know what you can afford.
So your next step is to assess your finances:
-
Compare
Buying with Renting
-
Find out
about interest rates
-
Understand
your closing costs
-
Figure
out your income, debt and down payment
-
Calculate
how much home you can afford!
Does it Pay to Buy a Home or Simply to Rent?
If,
like most first-time buyers, you are presently renting,
it's easy to calculate your cost - 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.)
But calculating the cost of homeownership
is much more complicated, because income tax considerations
affect your bottom line. And there is, in addition,
the uncertainty about how much the value of your home
will rise (or even fall) in the coming years.
As a tenant, you may be taking a standard
deduction on your income tax return. This is the time
to judge how that standard deduction stacks up against
the amount you'd be able to subtract from income if,
like most homeowners, you itemized deductions instead.
Once you itemize, you
can deduct:
- Home mortgage interest;
- All real estate taxes on any property
you own;
- Your state income taxes;
- Charitable contributions;
- Medical and dental expenses that
exceed 7.5% of your income;
- Personal property taxes if your state
has them; and most important
- Certain moving expenses
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
(the amount borrowed), so that the next month you're
borrowing a bit less, and owe a little less interest.
That allows more of your next payment to go toward reducing
principal. However, this process is very slow in the
beginning and the 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.
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