Buying a New Home
Buying and owning a home can be expensive. You will need funds for a down payment (perhaps 20% of the purchase price) and 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. 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 monthly mortgage payment, property taxes and insurance should be no more than 28% of your monthly household income.
Coming Up with the Down Payment
One of the biggest problems facing potential home buyers today is coming up with enough money for the down payment and closing costs. The amount of money you have available can greatly limit or increase your purchasing power. Rather than saving all of the money yourself, there are options that may help. Here are some ways to accumulate the necessary funds that are acceptable to most lenders.
- Have Your Parents Give You the Money as a Gift. Documentation will be required to prove that the money is actually a gift and not a loan. Any taxpayer is permitted to give up to $12,000 per year to another person without having to pay a gift tax. (NOTE: Unless you are putting down at least 20% or are obtaining a government-insured loan, 5% of the sales price must be your own money.)
- Borrow against Your 401K, IRA or Insurance policy. You can also cash out your 401K, but you will be subject to withdrawal penalties and payment of taxes. If you borrow against it, the loan payment will be counted as a debt. For first – time home buyers, the Federal Government allows penalty – free early withdrawal from an IRA (yours, your parents, or even your grandparents) to help purchase a home. NOTE: income taxes still apply on these monies. (Consult your tax advisor)
- Sell or borrow Against an Asset. Selling an asset such as a car can help increase the amount of money you have available. Borrowing against an asset is also acceptable as long as you can still qualify for your mortgage loan with the additional debt.
- Obtain a Low Point or Zero Point Loan. This will reduce the amount of your closing costs substantially. Be aware that points are basically prepaid interest and paying points can help reduce the interest you pay over the life of your loan.
- Ask the Seller to Pay for All or Part of Your Non-recurring Closing Costs. Your real estate agent can assist you with this when you make an offer on a home.
- Ask the Seller to Carry Back Financing. If the sellers do not need all the equity in their property, they may be willing to carry some of the financing which will reduce the amount of the down payment.
- Consider Different Loan Programs. Your loan officer can help you determine the best loan program to suit your needs. There are a wide variety of programs that require lower down payments and assistance with closing costs.
Tax benefits from home ownership
Many taxpayers find that the interest on their mortgage and the annual property taxes they pay are large enough to enable them to itemize their deductions instead of using what is commonly referred to as the "standard deduction." 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.