We have been receiving a lot of finance questions from our clients about purchasing a home. We want to make sure our clients receive the most accurate information, so we teamed up with Karen Jackson from First Priority Mortgage to answer the most common real estate finance questions. Karen has been providing lending advice and assistance for over 20 years in PA, DE, and NJ. She is one of our in-house mortgage lenders at Keller Williams Brandywine Valley that we recommend to many of our clients.
So let’s jump right in to the most asked questions that we get from someone who is trying to decide if purchasing a home is the right decision, or if they should continue to rent.
Why should I purchase a home?
There are three main reasons for why someone might want to buy instead of rent:
Building equity
If you are currently renting, you are already paying a monthly housing expense, but instead of you building equity for yourself, your landlord is the one reaping the benefits. If some of your monthly housing payment could automatically be put into a savings account, is that something you would like? Well, equity is kind of like a savings account. Every month, part of your mortgage payment pays down the principal balance, while the rest pays the interest. The difference between what you owe on your mortgage and what your house is worth is called your equity. Eventually, when you sell your house, you will get that money to keep, or to put into purchasing your next home.
Tax benefits (see below)
You have full control over your house
When you are renting, you cannot make changes to anything in your house. A landlord may let you paint, and hang a few items on the walls, but ultimately, you are expected to leave the property how you found it. Sometimes you are not allowed to have pets, and other times you can only have a specific type of pet. When you purchase a home, you are able to make all of the choices that will affect your surroundings. The only exception to this would be if you have a homeowners association (HOA). HOAs have a set of rules and regulations associated with purchasing in that neighborhood.
What are the tax implications of buying vs. renting?
There are two main tax benefits to purchasing a home:
Tax Deductions
When you own a home, the mortgage interest that you pay every month can be used as a deduction on your federal tax return, along with the property taxes (with some limitations).
The new tax laws impose a $10,000 limit on the taxes you can claim. This means that the most you can claim for the combination of real estate taxes and state and local income taxes is $10,000, plus the mortgage interest you paid during the year. With the standard deductions going up for the 2018 tax season, itemizing your deductions only makes sense if the itemized deductions exceed the standard deductions. The standard deductions are currently $12,000 for a single person, and $24,000 for a married couple.
So if the combination of mortgage interest and property/local income taxes (max $10,000) exceeds the standard deduction you can claim, then it makes sense to itemize, which will then decrease the taxes you owe and/or increase your tax refund.No taxes on your equity
The other big tax benefit to owning a home is one that you realize over time. The equity you gain on your primary residence is not taxable until you’ve exceeded a total gain of $250,000 for an individual or $500,000 for a married couple. Your “gain” is the difference between what you paid for the house, and what you sold it for; and that carries to the next house, and the next. In order to take advantage to this tax benefit, you must live in the home for 2 of the last 5 years. Most homeowners never have to pay any tax at all on the equity they gain through homeownership.
Do I need to put 20% down to purchase a home?
You definitely do not need to put 20% down to purchase a home. You don’t even have to be a first-time homebuyer to put very little down.
According to a study by Bank of America, 49% of renters still believe that a 20% down payment is required to purchase a home. In reality, the median down payment on loans approved in 2018 was only 5%!
However, if you are a first-time buyer, you can put as little as 3% down and possibly be eligible for some assistance in the form of grants or zero interest loans. The assistance programs do come with income restrictions, so you would have to check with a mortgage lender to see if you are eligible.
If you are purchasing in a rural area (USDA financing) or are a veteran (VA financing), you can get 100% financing, with a seller’s assist, and actually get into a home for little or no money upfront.
How is my mortgage payment determined?
A monthly mortgage payment has 4 components: called a PITI payment. It stands for Principal, Interest, Taxes, and Insurance.
Principal:
The amount of your payment that goes to actually paying down the balance of your loan.
Interest:
The amount that goes towards paying the lender for loaning you the money to purchase the property.
Taxes:
1/12th of the real estate taxes for your property (usually for school, county, and township taxes, depending on where you buy)
Insurance:
1/12th of your annual homeowners insurance premium, and any mortgage insurance.
- Some form of mortgage insurance is required when you have less than 20% down, but the amount if different for each type of loan.
If you would like a rough calculation of principal and interest in today’s market, every $1,000 of a loan is about $5 in your monthly payment. For example, a $100,000 loan would be about $500 in principal and interest. A $200,000 loan would be about $1,000 in principal and interest, etc. Then you would add taxes and homeowners insurance to that number, along with mortgage insurance. It is best to talk to a mortgage lender to know exactly how much mortgage insurance will be.
As Realtors, we cannot give advice on taxes or mortgages, so make sure you talk to a mortgage professional or tax advisor to learn more about your individual situation. If you would like us to put you in touch with someone, we can give you a recommendation.
Are you ready to take the jump from renting to buying? We would love to help! Send us a message so we can start the process or answer any questions you may have. Make sure you keep an eye our for our next Real Estate Finance blog post which will be about equity, and why you should start building it now.
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You may also be interested in receiving our FREE How To Purchase A Home Guide, which is available HERE.