The U.S. economy may not be growing at a lightning-quick pace, but it is once again able stand on its own feet and move forward, adding to its already world-leading GDP and creating jobs at a fairly steady pace.
A growing U.S. economy has a tendency to make consumers feel better about their financial situation. It also tends to boost the desire for home ownership, including consumers who may be considering buying their first home.
Although existing home sales are still well below their seasonally adjusted annual rate peak of 7.26 million set in Sept. 2005, the latest reading from May shows an encouraging 5.35 million existing homes sales on a seasonally adjusted annual basis. By comparison, the seasonally adjusted annual rate of existing home sales was a mere 3.45 million in July 2010. We've come a long way in a relatively short period of time.
But buying your first home isn't as cut-and-dried as it might appear. There are plenty of ins and outs to the process (and the years beyond your purchase) that first-time homebuyers need to be aware of, but which few actually think about.
With that in mind, let's take a brief look at nine crucial points you'll want to keep in mind when buying your first home.
1. There are additional costs beyond just your mortgage
Arguably the most important thing about buying your first home is understanding that the costs of homeownership extend far beyond your mortgage.
For instance, homeowners are responsible for paying property taxes on their home. Also, if you've taken a loan out through a financial institution, they'll require you to purchase homeowners insurance on the property. Another cost? If you aren't able to put the recommended 20% down on a home, your lender may charge you private mortgage insurance, or PMI. PMI is there to protect a lender in case a homeowner defaults on their mortgage when the loan-to-property value percentage is in excess of 80%. And finally, don't forget the costs to maintain your home. Things will break, so you'll want to have an emergency fund to cover such instances, as well as around-the-house maintenance.
2. There are also tax benefits
Buying your first home may come with some unexpected costs, but they can also lead to some substantial benefits come tax time.
A good example here is the mortgage interest deduction. According to the IRS, most mortgage interest will be fully tax-deductible, but that will depend on the amount of the mortgage and how you use the mortgage proceeds. Based on statistics from the Center on Budget and Policy Priorities, the mortgage interest deduction returns a minimum of $70 billion to homeowners each year. Additionally, the points you paid on your loan (each point represents 1% of the loan amount) are tax deductible.
3. If you spend a lot in the right areas, you can net even bigger tax discounts
Just as the old saying goes that it takes money to make money, sometimes a little extra spending about the house can result in ample tax deductions and lower long-term expenses.
For example, the Residential Energy Efficient Property Credit allows for a 30% credit on your taxes for the total costs to install solar panels, a solar water heater, or generally any renewable energy source. Under the Non-business Energy Property Credit a homeowner can get up to a 10% credit for using electric pumps, qualified furnaces, boilers and stoves that are running on natural gas, propane, or oil (or perhaps even biomass for stoves).
You'll want to keep in mind that the Non-business Energy Property Credit has a lifetime limit of just $500, with window improvements maxing out at $200, and energy-efficient additions to the property, such as an air-conditioning system or water heater, capping at $300.
4. Your credit score is incredibly important
You may not think about your credit score much, but it's an incredibly important component when it comes to buying a home as it will influence what interest rate you're offered by lenders, as well as how big of a loan you may qualify for (if you even qualify).
While the credit agencies are very secretive about their credit score formulas, the way to a great credit score isn't much of a secret at all. Make your payments to revolving accounts on-time; don't max out your credit cards or get anywhere near your maximum charge limit; and avoid opening new accounts around the time you begin shopping for your first home (since credit inquiries can hurt your score). Follow these simple rules and the loan process should be a lot easier.
5. Believe it or not, your mortgage rate may be negotiable
When you're buying your first home you might be tempted to take the first mortgage rate offered to you, but that may ultimately prove disastrous.
One fact about the homebuying process that far too few people employ is negotiating their loan rate. By shopping around you can potentially find a lower rate or play two, or more, financial institutions off of each other in order to gain your business. It's possible your current bank will match or top a rate at a competing lender to ensure it keeps your business. Long story short, make sure you shop around for a favorable mortgage lending rate.
6. You should plan on staying in your home for at least five years
In addition to the monthly payments you make on your home (and the added costs described above), there are fees associated with buying and selling a home.
For instance, buyers are typically responsible for a loan origination fee, appraisal fee, and any expenses associated with ensuring the title is clear of liens. Sellers are typically responsible for the commission costs of the brokers and closing costs. These fees typically take around five years to be absorbed by rising home prices based on the average rate of home price inflation over the past 100 years. In simpler terms, if you buy and sell your home in less than five years, your chances of actually losing money once the buying and selling fees are accounted for is much higher than if you waited beyond five years.
7. Your primary home is typically not a very good investment
Truth be told, if you're buying your first home as an investment, you could be sorely disappointed come retirement.
A primary residence is a place to live, and nothing more. According to data from Robert Shiller in Irrational Exuberance, between 1950 and 1997 home prices outpaced the rate of inflation by a mere 0.08% per year. This means that while the value of your home was rising over time, the cost of goods and services was rising at a nearly identical pace. Put plainly, a home tends to be stagnant investment, so don't count on your primary residence to fund your retirement.
8. Keep your emotions out of the buying process
When buying your first home it's really easy to fall in love with the first house that meets your lofty criteria. But, it's really important that you avoid becoming emotionally attached to the property you're trying to buy as it could wind up costing you big time.
It's important to remember that buying a home very well may be the largest and/or more important transaction of your life – and it should be treated as exactly that: a financial transaction. Just like we're taught to keep our emotions out of our investment portfolios, homebuyers need to remove their attachments to a property from the equation. Failing to do so could lead to overpaying for a property or getting saddled with a loan that doesn't have an optimal lending rate.
9. Lending rates may be up over the past month, but they're historically low
Finally, if you're ready to take the plunge and buy your first home, don't get caught up in the daily fluctuations of interest rates.
Over the past three months the 10-Year Treasury bond has jumped from a yield of 1.87% to about 2.25%. At one point last month it hit nearly 2.5%. Since mortgage rates are often tied to the movement of the 10-Year, you might be of the opinion that waiting things out on the sideline is your best bet for the time being. But, back things out a bit further and you'll discover that we currently have mortgage rates that are far and away better than we've ever seen. Even if rates are up 30, 50, or 75 basis points from where they were a few months ago, they're still exceptionally attractive compared to the nightmarish lending rates of the early 1980s.
Do you have stories from your first home-buying experience you'd like to share? Feel free to drop them in the comments section below.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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