Should I buy a house?
Certainly, not everyone wants to or should own a home. Home ownership involves substantial commitment and responsibility. People whose work requires frequent moves or whose financial position is uncertain particularly benefit from renting. Renting also provide more leisure time by freeing tenants from management and maintenance.
Those who choose home ownership over renting must evaluate many factors before they decide to purchase property. And the purchasing decision must be weighed carefully in light of each individual’s financial circumstances. The decision to buy or to rent property involves considering
- How long a person wants to live in a particular area,
- A person’s financial situation,
- Housing affordability,
- Current mortgage interest rates,
- Tax consequences of owning versus renting property
- What might happen to home prices and tax laws in the future
Mortgage terms and payment plans are two of the biggest factors when deciding whether to own or rent a home. Although many loan programs of the past are either not offered or offered only to highly qualified borrowers, liberalized mortgages are still available to those who qualify. For example, the federal housing Administration ( FHA) and the Department of Veteran Affairs( VA) have programs with low down payments and lower credit score requirements.
Ownership expenses and ability to pay
Home ownership involves many expenses, including utilities, such as electricity, natural gas, and water, trash removal, sewer charges, and maintenance and repairs. Owners also must pay real estate taxes, buy property insurance, and repay the mortgage loan with interest. To determine whether a prospective buyer can afford a certain purchase, most lenders use automated underwriting and credit score. In the past, the formula for homebuyers who were able to provide at least 10 percent of the purchase price as a down payment was that the monthly cost of buying and maintaining a home—mortgage payments, both principal and interest, plus taxes and insurance impounds could not exceed 28 percent of gross income. The payments on all debts normally including long-term debt such as car payments, student loans, or other mortgages could not exceed 36 percent of monthly income. Expenses such as insurance premium, utilities, and routing medical care were not included in the 36 percent figure but were considered to be covered by the remaining 64 percent of the buyer’s monthly income. These formulas may vary, however, depending on the type of loan program and the borrower’s earnings, credit history, number of dependents, and other factors. But today, credit scores play a key role when lending ratios are true for most Fannie Mae and Freddie Mac conforming mortgages, but loans with more liberal ratios are available.
For example Prospective homebuyers want to know how much house they can afford to buy. The buyers have gross monthly income of $6,000. The buyers ‘allowable housing expenses may be calculated as follows:
$6,000 gross monthly income x28%=$1680 total housing expenses allowed
$6,000 gross monthly income x36%=@2,160 total housing and other debt expense allowed
These formulas allow for other debts of 8 percent of gross monthly income- the difference between the 36 percent and 28 percent figures. If actual debts exceed the amount allowed and the borrowers are unable to reduce them, the monthly payment must be lowered proportionately because the debts and housing payment combined cannot exceed 36 percent of gross monthly income. However, lower debts would not result in a higher allowable housing payment: rather, it would be considered a factor for approval.
Purchasing a home offers several financial advantages to a buyer. First, if the property’s value increases, a sale might bring in more money than the owner paid-a long term gain. Second, as the total mortgage debt is reduced through monthly payments, the owner’s actual ownership interest in the property increases. A tenant accumulates a good credit rating by paying rent on time; a homeowner’s mortgage payments build personal net worth. The third financial advantage of home ownership is the tax deduction available to homeowners but not to renters.
To encourage home ownership, the federal government allows homeowners certain income tax advantages. Homeowners may deduct from their income some or all of the mortgage interest paid, as well as real estate taxes and certain other expenses. Tax considerations may be an important part of any decision to purchase a home.
In the late 1990s, the federal government enacted several federal tax reforms that significantly changed the importance of tax considerations for most home sellers. For instance, $500,000 is now excluded from capital gains tax for profits on the sale of a principal residence by married taxpayers who file jointly. Taxpayers who file singly are entitling to$250,000 exclusion. The exemption may be used repeatedly, as long as the homeowners have both owned and occupied the property as their residence for at least two of the past five years.
First-time home buyers may make penalty-free withdrawals from their tax-deferred individual retirement accounts (IRAs) for down payments on their homes. However, these withdrawals are still subject to income tax. The limit on such withdrawals is $10,000 and must be spent entirely within 120 days on a down payment to avoid any penalty.
Home owners may deduct from their gross income
- Mortgage interest on first and second homes for mortgage balances below $1 million, or $500,000 if married filing separately
- Real estate taxes ( but not interest paid on overdue taxes)
- Certain loan origination fees,
- Loan discount points ( whether paid by the buyer or the seller)
- Loan prepayment penalties.