Owning a home. Like having children, it is both one of the most inspirational and confining steps a person can take.
Take today for example. As I sit here working on this week’s piece about home ownership, I’m almost overwhelmed with the list of things that need to be done around here. (Oh well, they’re not happening today). Yet at the same time there is a sense of fulfillment that is perhaps best expressed by Robert Fulghum from his surprisingly out-of-print book All I Really Need to Know I Learned in Kindergarten: “Be aware of wonder. Remember the little seed in the Styrofoam cup: the roots go down and the plant goes up and nobody really knows how or why, but we are all like that.”
When you buy a house you’re making a commitment to a community and gaining a place—perhaps for the first time since you moved out on Mom and Dad—to call home, which matures and supports you in ways you won’t realize until later.
So why is this a great time to buy a home?
Well, if you’re ready, the best time to buy a home is during one of the regular down cycles in real estate, and this is definitely one of those. Just for example, The Maui News had 13 foreclosure legal notices on April 17. That sad situation isn’t likely to improve for a while. However, the silver lining is that there’s a ready inventory of below-market homes to purchase during a period when there are a lot of other incentives to encourage homeownership.
One of those incentives is from the IRS (of all entities!). They’ll give you an $8,000 refundable tax credit if you’re a first-time homebuyer before December 1, 2009. If you qualify, once your home has closed you can file either an amended 2008 return or your 2009 return to get your $8,000. Unlike the program in 2008, you don’t have to repay this credit if you live in the home for three years. This is probably a once-in-a-lifetime opportunity, so don’t dawdle.
The taxman provides another benefit to home ownership: you can deduct your property taxes and mortgage interest. This is a substantial savings since rent is never deductible but the vast majority of your mortgage payments will be. Thus, a $2,000-a-month mortgage payment would reduce your federal and state taxable income by approximately $24,000 a year. In the 15 percent federal and 6 percent state tax brackets that’s $420 a month less taxes, which helps you make mortgage payments that will probably be higher than rent. Just remember to adjust your withholding when the home closes.
Additionally, the nonprofit Na Hale O Maui (nahaleomaui.org) is offering affordable homes to Maui residents. They have regular homebuyer seminars, which you have to attend before being allowed to buy one of their homes, but have some rehabbed homes available now and will shortly be offering a community of new homes built with prefabricated parts that are much cheaper than prevailing options.
Current low interest rates also make home ownership easier. A $2,000-a-month mortgage payment bought a $316,000 home at 6.5 percent a year-and-a-half ago, but today it buys a $394,000 home at 4.5 percent. Although the current interest rate is hovering around 5 percent as this goes to press, you can pay additional points to buy your rate down to the 4.5 percent range.
Before you go shopping, do some relatively simple math. Take your gross annual income before taxes and multiply it by 30 percent. Now divide that again by 12 months. Although it varies by loan type, that’s generally considered to be the monthly payment you can make on your home. Now, use a very crude rule of thumb to convert that into how much home you can afford: for a 4.5 percent rate, multiply it by 197; for a 5 percent rate, multiply it by 186. This will give you the loan amount, which unless you have a large down payment, should probably be considered the high end of your buying power. Although you technically need a financial calculator, this simple ratio of house purchase to monthly payment works (the 197 factor is the $394,000 home divided by the $2,000 monthly payment from the prior example).
Here are a few other important things to keep in mind. First, you’re going to need to have good credit—the downfall of sub-prime lending also made buying a home with a marginal credit score almost impossible. Second, you’ll need at least 5 percent down for an FHA loan. Finally, your other credit payments will count against you. While you can use 30 percent for your home, you can generally have only 35 percent of your income for total debt service, so if your other debts exceed 5 percent of your income, they’ll start to chip away at how much home you can buy.
Make the effort and see if it’s feasible for you. You might be surprised. Then you can spend your Saturday’s mowing the damn lawn, too. MTW
Doug Levin is a Maui-based CPA