Buying a house is a huge financial undertaking. If you’re planning to become a homeowner come 2017, here are five rules you should know by heart.
1. It never pays to be house poor
You may be tempted to stretch your budget and buy that larger home with the bigger yard, but remember: The more you spend on housing, the less wiggle room you’ll have in the rest of your budget. Not only that, but overspending on housing can get you into serious financial trouble. According to a report by the MacArthur Foundation, between 2011 and 2014, more than 50% of Americans had to make at least one major economic sacrifice to cover the mortgage or pay the rent — sacrifices such as delaying retirement savings or taking on credit card debt. If you’re not careful, buying too much house could cause the rest of your financial plan to take a serious beating.
As a general rule, your total housing cost shouldn’t exceed 30% of your income. This includes your mortgage payment, property taxes, and homeowners insurance. Yet in 2015, almost 12 million U.S. households spent more than 50% of their income on housing. If you stay under that 30% threshold, you’ll have more flexibility when an unexpected bill pops up.
2. Homeowners get special tax breaks
The average homeowner spends anywhere from 1% to 4% of his or her home’s value on annual maintenance and repairs. While that’s potentially a lot of money to shell out, the good news is that there are a number of tax breaks designed to give homeowners some financial relief. For most homeowners, the mortgage interest deduction offers the greatest amount of savings. Currently, you can deduct the interest you pay on up to $500,000 of mortgage debt as a single tax filer, and up to $1 million of mortgage debt if you file a joint return. If you paid points on your mortgage, those are typically deductible too (though in some cases, you may need to take that deduction over the life of your loan, as opposed to claiming it all right away). Not only that, but the property taxes you’ll inevitably have to pay are deductible as well.
3. Put down 20% or prepare for PMI
There’s a reason prospective homeowners are encouraged to make a 20% down payment when they go to buy. If you fail to come up with that amount, you could be required to buy private mortgage insurance, or PMI, which is yet another payment you’ll need to make to your lender. In most cases, PMI equals 0.5% to 1% of the amount you borrow. So if you take out a $200,000 loan and need to pay PMI at 1%, you’ll have to spend an extra $2,000 a year, or $166 a month, on top of your regular mortgage payment. However, that bill doesn’t last forever. Once your equity in the house exceeds 20% (based both on the reduction in your mortgage balance and the appreciation of the home’s value), you can ask your lender to drop the PMI.
4. You may get to deduct moving expenses if you relocate for a job
If you’re buying a house because you’re simultaneously relocating for a new job, you may be eligible for yet another tax break. As long as you meet certain IRS criteria, you can deduct expenses such as hiring movers or renting a storage unit. To qualify, you’ll need to work full time for 39 out of the 52 weeks immediately following your move. Furthermore, the commute to your new job must be at least 50 miles longer than the distance between your old home and your previous job. As an added bonus, the deduction for moving expenses is considered an above-the-line deduction, which means you can take it even if you don’t itemize on your taxes.
5. Your homeownership costs are likely to climb
While you can’t predict the future, you can almost certainly bank on one thing: The longer you stay in your home, the more you’re likely to spend on it. First, there’s the aging factor. As homes get older, they tend to require more work. But property taxes also have a way of going up, even during periods when home values fall. In 2000, homeowners across the U.S. paid about $247 billion in real estate taxes. By 2010 — not long after the housing bubble burst — that figure had climbed to $476 billion even though the housing market wasn’t close to recovery at that point. Of course, there’s a good chance that as your homeownership costs go up over time, so too will your income. But to be prepared, aim to pad your emergency fund with a little extra cash in case your expenses climb sooner than expected.
Though buying a house can be an expensive prospect, there are many rewarding aspects of homeownership that make all the sacrifices worthwhile. The key is to buy the right home for your budget and be prepared for what lies ahead.
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