The Complete Guide for First Time Home Buyers
Buying your first home? Excellent! This is such an exciting time for you, but of course it can seem daunting. Perhaps you're finding it difficult, and you're tempted to just jump on the first house that looks remotely suitable.
Think of buying your first house the same way you think of buying a pair of shoes - if they don't feel comfortable in the store, they're never going to feel right later.
Luckily our team has decades of experiencience working through this difficult process and we wrote this guide to help you navigate the most important transaction of your life.
Why should you buy a house?
I probably don’t need to tell you all the personal benefits of owning your own home – no landlord, your own yard, paint the walls the color you like, etc, etc. All that is great and the thought of those freedoms is probably what brought you to this guide.
Wealth BuildingWhat you may not know is the most important reason to buy your home – wealth creation. Home buying is one of the single greatest wealth building moves you can make as an American. That’s right, buying a home is one of the single greatest wealth building moves you can make as an American.Home buying builds wealth by taking advantage of two factors: leverage and tax breaks.
The first wealth builder comes in the form of tax savings. How does it work? In a nutshell, all of the mortgage interest you pay on your loan (up to 1.1 million) and property tax expense is tax deductible.
I am going to use simple numbers for this example since everyone’s tax bracket is different but you will get the idea. Let’s say you make $100,000 per year and your tax bracket is 30%. If you are renting and have no other deductions, you are going to pay $30,000 in taxes for the year. Now let’s assume you borrowed $350,000 for your new home at an interest rate of 4.5%. In the first year of owning your home you are going to pay $15,634 in interest and $4375 in property taxes. Since these two numbers are tax deductible your taxable income drops from $100,000 to $79,991. You now pay 30% on $79,991 as opposed to $100,000. That means your tax liability for the year goes from $30,000 to $23,997. You save $6,000 in tax expense because you own a home!!! The bank that holds your mortgage will send you a 1098 mortgage interest statement each year. You will take this along with your property tax statement to your CPA and like magic you will see your tax burden drop year over year.
What is Leverage?The second wealth builder is leverage. Leverage is defined as “the use of a small investment, credit, or borrowed funds to gain a very high return in relation to one’s investment, to control a much larger investment, or to reduce one’s own liability for loss.” For most of us buying a home will be the only exposure to leverage we will experience. It is important to note that leverage is not always a guaranteed winner as many people learned in the Great Recession of 2008. If the asset you invest in loses value, your small initial investment can disappear. That said, let’s stay positive and explore how leverage can work for us. Let’s assume you want to buy a $350,000 home. You will need a minimum down payment of 3.5% which is $14,000. If your $14,000 is sitting in a normal bank account, you are making 1% to 2% on your money. That is roughly $280 per year. I am going to keep these calculations simple and only use simple interest assumptions as opposed to compounding. We don’t need to get that detailed to make this point. Now let’s assume you leverage your $14,000 to buy a $350,000 home. Your $14,000 just bought you an asset worth $350,000. If we make the assumption that the value of your home is going to keep up with inflation at 2% to 3% per year that means your home value is going to increase $10,500 per year. There you have it! Your $14,000 can make you $280 per year or you can leverage it to buy a home and make $10,500 per year. There are plenty of places to research the historical rates or appreciation on homes.
Home Buying vs Renting
Make payments to yourself, not the landlord
Special Loan Programs
This month we have special programs with low interest rates for both Owner Occupied & Second Homes. Contact us now to determine your eligibility!