Put Your Rent Check to Work:-The only one who benefits from a rent check is the landlord. Renters never see that money again, while homeowners usually profit when they sell. In addition, renters can’t use any of their rent payment as a tax deduction, like homeowners can. If you or someone you know is renting, it’s time to put that rent check to better use!
The mortgage-interest deduction is probably the best financial argument for buying rather than renting. Consider this example:
If you can afford a mortgage payment of $1,000 (principal and interest only), you can buy a house for $151,426 if you put 10% down on a 30-year mortgage at 8% interest. If your payments started in January, you would pay $10,862 in interest for the first year in the home. That entire amount is deductible on your federal income tax return! Assuming you are in the 27.5% tax bracket, you would save $2,989 in taxes, or $249 per month. So your $1,000 payment is really only $751 when you factor in the homeowner’s tax advantage.
Can A Renter Really Afford To Buy?
The real question is whether renters can afford not to buy. The tax savings alone make the purchase of a home a wise financial decision. But let’s go a step further.
Using the same example, a 10% down payment would create an immediate equity of $15,142. Assuming the $151,426 house grows in value by just 3% a year, in five years it would be worth $175,544. The original loan amount would then be down to $129,565, yielding an equity of $45,980. In addition, remember the nearly $3,000 tax savings every year. The total value of your equity and tax savings would be almost $61,000 after five years.
Pick A Loan
To take advantage of the financial benefits of homeownership, renters must first find out how much buying power they have. We can help. Call us for information about the whole range of mortgage options now available, including low- and no-down-payment loans, and programs that allow buyers wrap home-improvement costs and closing costs into the mortgage.
Although some lenders allow buyers to use up to 41% of monthly income to purchase a house, beware of becoming “house rich and cash poor.” Be sure to budget for homeownership costs beyond the mortgage, including expenses for:
decorating and furnishing
homeowners association fees (if any)
utilities-power, water, sewer, cable, trash pick-up
yard tools, supplies and general upkeep
home repairs, supplies, cleaning and upgrades.
Today, home ownership is a wonderful dream-come-true for more people than ever before. Let me help turn those dreams into a home to be proud of.
To Pay or Not to Pay : Among the first things people ask when shopping for a mortgage loan is: What’s the interest rate? The answer is often a percentage rate with points—for example, 4.5% plus 2 points. Here’s what those points are all about.
A loan discount point is equal to 1% of the loan amount. So, on a loan of $100,000, a borrower would pay $1,000 per point to the lender. (Fees, such as loan origination fees, are sometimes quoted in points, but here we’re talking about discount points, which are prepaid interest.)
What’s the advantage to the borrower to pay points in addition to interest? By paying points, borrowers can get a lower interest rate—a discounted rate. In other words, borrowers pay points to “buy down” the mortgage interest rate, reducing their long-term interest expense on the loan.
To Pay Or Not To Pay
It is certainly possible to take out a mortgage without paying points. In fact, many borrowers opt to do so if they are short of cash for their home purchase or they don’t expect to own the home for long. But for many people, getting a lower interest rate is worth the up-front payment of at least some points.
What confuses many loan shoppers are the different combinations of rates and points available from lenders. Is a 4.5% loan with 2 points, for example, a better deal than a 5% loan with no points? That depends. Paying one point may get you a 1/8% to 1/4% drop in interest rate, depending on the current market. If the going trade-off is 1/4%, then our example loans are comparable. Still, one of those loans may be better for the borrower’s financial circumstances. Here’s how to know when paying points pays off.
1. Run The Numbers
For illustration purposes, say you pay 2 points ($2,000) on a $100,000, 30-year mortgage to get a 4.5% interest rate. Your principal-and-interest (PI) payments would be $6,080 per year. If instead you took a 5% loan paying no points, your annual PI payments would be $6,442—$362 more per year. You would, however, have to own the home about 5 1/2 years for your savings to pay back your $2,000 up-front points expense ($2,000 Ã· $362 = 5.53).
But what if you move sooner? You’ll lose more money in points than you’ll save with the lower-rate loan. Consider, too, you could have taken the higher-rate, no-point loan and invested your $2,000 elsewhere.
Another factor is how your tax bill will be affected. Paying less interest means a smaller mortgage-interest tax deduction, reducing the real savings achieved by buying down the rate. On the other hand, points are tax deductible in most cases. Consult IRS Publication 936 for further details.
2. Pay For The Long Haul
Paying points may be a great idea if you own your home for a while—how long depends on how much difference in interest rate your points can buy. If 2 points could buy you a larger drop in interest rate (rather than the 1/2% we calculated earlier), you could recoup your cost in a shorter time. If you owned the home in our earlier example for the full 30 years, your PI savings would be around $8,850 (not factoring in tax implications).
3. Finance The Points
If you think paying points is a sound choice but you are short of cash, you may be able to roll the points into your mortgage loan. In our example, you would finance $102,000 at the 4.5% rate.