There's no point wasting time and
energy house-hunting before you know what you can afford.
So your next step is to assess your finances:
Compare Buying with Renting
Find out about interest rates
Understand your closing costs
Figure out your income, debt, and down
payment
Calculate how much home you can afford!
Does it Pay to Buy a
Home or Simply to Rent?
If, like most first-time buyers, you
are presently renting, it's easy to calculate your cost - simply, the monthly rent you
pay. (Utilities, phone, cable, and other costs can be ignored in this comparison because
they'll be approximately the same whether you rent or buy.)
But
calculating the cost of homeownership is much more complicated, because income tax
considerations affect your bottom line. And there is, in addition, the uncertainty about
how much the value of your home will rise (or even fall) in the coming years.
As a tenant, you may be taking a standard deduction on your income tax
return. This is the time to judge how that standard deduction stacks up against the amount
you'd be able to subtract from income if, like most homeowners, you itemized deductions
instead.
Once you itemize, you can deduct:
Home mortgage
interest
All real estate taxes on any property you
own
Your state income
taxes
Charitable
contributions
Medical and dental expenses that exceed 7.5% of your
income
Personal property taxes if your state has
them
Certain moving expenses
At the start of a mortgage
repayment schedule, when the debt hasn't been reduced yet, almost all of your
monthly payment goes toward interest. A bit goes toward reducing principal (the amount
borrowed), so that the next month you're borrowing a bit less, and owe a little less
interest. That allows more of your next payment to go toward reducing principal. However,
this process is very slow in the beginning and the interest portion remains high for many
years.
Between the mortgage interest and the property
tax deductions, you can figure that Uncle Sam is shouldering part of your
monthly mortgage payment - 28% of it, in fact, if that's your tax bracket. Your state
income tax bracket can also be added to that, before you calculate how much you save on
income tax as a homeowner.