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!
Tax Considerations of Buying
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 home ownership 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
Uncle Sam Helps Make Your Mortgage Payment
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.
