Homeownership has long been the American Dream, but for many workers, that goal has been largely unattainable of late. That's why it's encouraging to hear that a large chunk of renters might soon move over to the ownership camp. Specifically, roughly 32% of Americans plan to buy a home within the next five years, according to a newly released NerdWallet study. But while there are certain advantages to owning a home, there are also some pitfalls you'll want to avoid. Here are just a few things you ought to know if you're aiming to buy a home in the not-so-distant future.
1. You should aim for a 20% down payment
These days, you don't necessarily need to come up with a 20% down payment to buy a home -- but you're better off doing so nonetheless. Not only will putting down 20% help minimize the interest you pay on your loan, but it'll also help you avoid private mortgage insurance, or PMI, which will only make your mortgage more expensive.
2. Your mortgage interest deduction could lower your taxes
Homeowners get a number of tax breaks, the most lucrative of which is often the mortgage interest deduction. Now you may have heard that this benefit disappeared under the recently implemented changes to the tax code, but that's not true. You can still deduct the interest you pay on your mortgage in full provided your loan amount doesn't exceed $750,000. But since the median home value in the country is hovering around the $254,000 mark, most new buyers won't have to worry about going over that cap.
Furthermore, you should know that the mortgage interest deduction will be worth the most during the earlier stages of your loan, where more money is directed toward interest as opposed to principal. This means that your deduction can help offset other taxable events that might occur in the near term, such as selling a large number of investments at a gain.
3. You may not get to write off your entire property tax bill
If you live in a state with higher-than-average property taxes, here's a bit of bad news: Whereas it used to be that you could deduct those taxes in their entirety, under the new laws, the state and local tax deduction, which includes property taxes, is limited to just $10,000 per year. Now seeing as how the average American spends just about $2,100 annually on property taxes, that $10,000 cap may not impact you. But if you're buying in a state like New Jersey, which has the highest property taxes in the nation, you may lose out on a portion of that benefit.
4. Home equity loan interest is no longer deductible
If you're thinking of buying a fixer-upper and taking out a home equity loan to make some improvements, here's one thing you should know: Under the new tax laws, home equity loan interest is no longer deductible. This means that you may be better off rolling some of your anticipated improvement costs directly into your mortgage, if you have the option to do so. That way, you'll get the full interest deduction, assuming your home loan doesn't exceed the $750,000 limit discussed earlier.
5. You might spend a boatload on maintenance
As a general rule, your housing costs shouldn't exceed 30% of your take-home pay. But while some financial experts will tell you that that 30% is meant to include your mortgage payment, property taxes, and homeowners' insurance alone, if you really want to play it safe, make sure it comprises your anticipated maintenance costs as well. NerdWallet reports that routine maintenance on a home will run between 1% to 2% per year, and that's actually a somewhat conservative estimate. But if we take the median home price of $254,000, that's about another $2,500 to $5,000 annually, right off that bat. Assuming you're buying an average home, be sure to include these figures in your housing cost estimate to ensure that you don't wind up in over your head.
Furthermore, you'll need to go into homeownership with a healthy amount of emergency savings. Though the aforementioned figures apply to expected maintenance, there's a good chance you'll encounter some unplanned surprises along the way, like a leaky roof or a busted furnace. And those repairs can well exceed the amount you may have initially budgeted for housing.
Buying a home is a great opportunity to turn your greatest monthly expense into an investment. Just be sure to read up on the benefits, drawbacks, and costs of homeownership so you know what you're getting into.
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