Market News
Daily Real Estate News | March 11, 2008
Why Now is a Smart Time to Buy
Now is a great time to buy a home, say the financial gurus at the Wall Street Journal.
The Journal calls it a buyers market and offers these suggestions for first-timers getting their feet wet. While their advice is solid, it’s not revolutionary, but some potential customers might find it reassuring.
Remember this is a place to live not a stock market investment, they say. Lenders want buyers to spend no more than 28 percent of their gross monthly income on mortgage payments, real estate taxes, and home insurance. Buyers shouldn’t count on stretching further because lenders won’t approve their loans.
- Cash is king. Having enough money in the bank to pay closing costs that are typically an additional 2 percent to 3 percent of the price of the home is necessary.
- Location. Location, location. As any good real estate professional knows, homes in good school districts where the crime is low are much more likely to hold or increase their value.
- Compare. Besides just looking at the comps, buyers should examine what it would cost to rent a similar house in the same area and they might consider what it would cost to buy land and build a comparable home.
- Think long haul. It will probably take at least six or seven years of living in the house to be able to sell and come out ahead.
TAX ADVANTAGES OF OWNING REAL ESTATE
If you have been trying to purchase a home in California during the past several years, you know that the high prices have made it very difficult. If you have been sitting on the “sidelines” and waiting for the market to turn, you are now in luck. However, although housing prices have decreased, you still may be concerned about how much your monthly payment will be and whether or not you can afford all of the other costs involved in owning a house. Fortunately, the U.S. tax code gives favorable tax benefits to homeowners. This article will give you practical information to help you determine how much you may save in taxes by owning a home.
For the purposes of this discussion, we will assume that the mortgage on a new home is $350,000 with an interest rate of 6.75%. The monthly mortgage payment for principal and interest would be $2,270. Of this amount, nearly $2,000 each month would be tax deductible mortgage interest. In addition, the property tax of approximately $4,000 would also be a tax deduction (in most cases).
If your tax bracket is 15% for the IRS and 5% for the State of California, you will benefit by 20% for all of your taxable deductions. Therefore, $2,000 of mortgage interest each month plus the property tax equals an annual deduction of approximately $28,000. This amount applied to the tax rate of20% results in a tax reduction of $5,600 each year. This averages out to $467 each month. This means that instead of paying $2,270 each month for your mortgage, in effect it is only costing $1,803 each month.
These numbers become even more dramatic if you are in a higher tax bracket. For example, if your combined federal and state tax bracket is 37% (which is more likely), your tax savings will be $10,360, or $863 per month. Your effective mortgage payment is $1,407 each month. If you happen to be paying $1,500 per month for rent on an apartment, then you would be saving money by purchasing a home!
Of course each individual situation is different and the tax law is complex. There may be alternative minimum tax issues that may limit your tax benefits. These examples simplify the results but give a reasonable estimate of how the tax savings can work to your benefit.
Written by Rob Stern who is a tax and financial planning specialist and a shareholder in Stern, Kory, Sreden & Morgan, An Accountancy Corporation in Stevenson Ranch. Commentary does not constitute tax, legal or financial advice
