Buying A Home

One of the biggest financial decisions for all of us is whether and how to buy a home.   Typically home buyers hope to build equity over a long period of time, possibly so that they have an asset they can use in the future either to buy another home or to convert to income.  Renters usually are looking for more flexibility and are willing to forego building their own equity while either paying down someone else’s mortgage for them or providing that other person with a source of income.  Buyers are wise to plan on being in their homes for at least five years to recoup the costs associated with maintaining, repairing, and selling the property.

There are plenty of reasons to lease, and plenty of reasons to purchase.

You may want to lease if:  1)  you need or want the ability to move. Lease agreements can be as short as month-to-month, but are typically on a year-to-year timeframe. If you need to move for work or for other reasons, it is relatively easy to do so when you lease. 2)  you lack the time or resources to maintain your own home. When you lease, your landlord will take care of maintenance and repairs.  3) you want to avoid some of the expenses that come with home ownership: a large down payment, property taxes, homeowners insurance, and closing costs for example.

You may want to buy if:  1)  you view real estate as an investment. Like any investment, real estate moves up and down in value, but over the long term you may build equity through home ownership. When you own you are also paying for something that is your property instead of paying for someone else's mortgage. As an owner you might also choose at some point to rent your home to someone else, thereby having someone else pay your mortgage for you, or if your mortgage is paid, generating income for yourself.  2)  you could use the tax deduction available on mortgage interest and property taxes. Under current tax laws, you are able to take a deduction for interest and taxes paid on your income tax return, subject to income limits and restrictions.  3)  you want the stability and emotional security of owning your own home. If you lease, your landlord could choose to sell their property, which may mean you have a new landlord that chooses to live in the place you were leasing or chooses to lease that place to another person when your lease expires. In between lease terms, a landlord might also change the rent or other terms in the lease, which could be to your disadvantage.  4)  you enjoy home decoration, home improvement, maintenance, landscaping or gardening. As an owner, you can do what you want to your property, subject to covenants, conditions and restrictions or "CC&Rs" that may exist in your neighborhood. If you are a tenant you are limited by your agreement with your landlord.

Financing your home purchase:  1)  you may want to delay financing the purchase of a home if your credit score is low or if you are carrying a large amount of consumer debt in the form of auto loans or credit card balances. Some lenders may require you to pay off your other debt before they will lend you the money to purchase a home, and a poor credit rating usually means you have to pay a lender more interest; 2)  you will need to decide between a fixed rate versus a adjustable rate mortgage. A fixed rate mortgage has an interest rate that never changes for the life of the loan; payments on longer term mortgages will generally be lower, but more interest is typically paid over the life of the loan. An adjustable rate mortgage has a variable rate, typically low at first, but possibly much higher if market rates rise. An adjustable rate mortgage may make sense if you intend to stay in your home for only a few years.  3)  You have the option of using a bank or a mortgage broker to help you with financing; shop and compare to see who will provide you the best service and best cost structure. There are number of different fees associated with home purchases, and they vary between banks and mortgage brokers. Title fees, document preparation fees, inspection or appraisal fees are examples of some of these fees. You may pay "points" or upfront fees to one lender, while another lender may offer the same interest rate with much lower loan origination fees. Mortgage brokers may offer more competitive rates than larger banks, but may also get a better commission from a certain lender, so it is important to determine whether there are any conflicts of interest.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.  This information is not intended to be a substitute for specific individualized tax advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor.

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