Have you ever asked yourself if buying a house makes sense for me? This page will help you to determine if owning a home is a wise choice for you. As we go through this process, please remember that we are using general guidelines and your actual numbers may be different. Talking with a good Mortgage Consultant and a Tax Adviser will help you determine your personal affordability levels.
First we need to determine your approximate monthly house payment. Underwriting guidelines vary with different programs, but many programs allow 36% of your gross income for your house payment. The gross income is the amount showing on your W-2 or W-9 at the end of the year, not the amount you deposit each month. Take the yearly income and divide by 12 to find your monthly income, then multiply by 36%. to find the monthly payment you can afford.
$75,000 / 12 = $6,250 per month income.
$6250 X 36% = $2,250 per month available for home payment.
Now you can put the $2,250 per month available for your home payment into the Maximum Mortgage Calculator below to see how much you can afford for the purchase price. You can use 4% for the interest rate or you can get the current mortgage rate from the Home page of this website. Most home loans are 30 year mortgages, so use 30 years for the years in mortgage.
Next you can add your down payment to this amount to get the total purchase price. The money for the down payment can also come from investment accounts and gifts from family etc. A good Mortgage Consultant will give you the program guidelines for the loan you are applying for. Discuss your down payment when you first meet with your Mortgage Consultant.
$471,000 + $35000 down payment will give you a purchase price of $506,000.
Now we can fill in the values into the Rent vs Buy Calculator.
- Input the amount of rent you pay each month
- Add any additional monthly fees you pay. (may be paid parking or association fees etc.)
- Input what you pay for renters insurance
- Input an estimate that your rent will go up every year
- Input maximum loan amount plus the available down payment
- Input the amount you think house values will go up each year. Currently, King County home values are going up about 10% per year. You may want to use 2 to 5 percent here
- Most home loans are for 30 years
- Closing costs range from 8 to 12 percent of the purchase price
- Homeowners insurance will cost from $500 to $1000 per year. Talk with your insurance agent
- Property taxes vary. In King County they are about 1 to 1.5 percent of the value of the home
- Annual maintenance can be $2000 to $5000 per year.
This will show you the financial benefits of owning your home over the next 30 years.
There are also Tax advantages for owning a home.
Please Note: Congress is in the process of updating the US tax system and some of these details will change once the tax plan is finalized and passed. This webpage will be updated once the tax plan is finalized.
The first thing you can write off is some of your closing costs. Be sure to take a copy of the final settlement statement to your tax adviser for your one tax time write off.
Next you can write off the interest you pay on your mortgage. Most of the monthly payment the first few years is interest. Use the interest only calculator below to see how much of the payment is interest. Each month the amount of interest you pay will be less, but using the interest payment times 12 will be close enough to the amount of interest you will be able to write off your taxes.
Using the $471,000 loan amount and an interest rate of 4.0% from our example earlier, you will have a tax write off of $1,570 per month. Multiply the monthly interest payment by 12 months and you will have a yearly interest tax write off of about $18,000 for the year. (round down the actual number as the amount you pay towards interest is less every month)
$1,500 X 12 = $18,840
This means you will owe less taxes at the end of the year or you will receive a larger tax refund after you file your taxes. There will be a much higher tax savings if this lowers you from a higher tax bracket to a lower tax bracket. Use the tax calculator below to see if you will be in a lower tax bracket. (Note: This will change with the new tax bill, once it is passed)
If you will be in a lower tax bracket because of the home mortgage tax write off, you can calculate your savings with the income tax calculator below.
By now you should be able to see that if you can afford the mortgage payment, there are many advantages for owning a home.
- With the value of real estate increasing Most years
- Increase in equity and a decrease in mortgage debt every month
- Tax savings on your earned income
Owning a home is more than just a roof over your head. It is an investment in yourself and your family for now and the future. Feel free to contact me at the phone number on my business card, or use the contact tab on this website and I will answer any questions you may have.
Ron Erickson