Buying A House And Tax Breaks

[MorningStar]

My husband and I have started house shopping and after looking at a house last night, our realtor and lender were trying to convince us that we could afford to pay $400 more per month than what we're paying now in rent because of the tax break. I know the tax break is helpful in a lot of situations, but I told them the concern is how we get that extra money now and we're in a low tax bracket. They said we could fill out a new W4 and change our deductions, but I'm looking at my husband's paycheck and even if it weren't taxed at all, that wouldn't equal a savings of $400 per month or even close. Some paychecks there isn't any Federal Income Tax withheld. I will also probably make double what I made last year teaching piano lessons and don't want to end up owing when tax time comes. We will also have to move out of the area and I will have to start over and find all new students. We can't pay all of our bills and rent with just my husband's take home pay. We need at least half of what I make to survive and the rest is going into savings right now so we can make this transition and have it for emergencies.

Our realtor says everything is going for over the asking price right now and is afraid we're not going to find anything else for this price, but we don't feel good about the decision. If it were in this neighborhood, it would probably be doable, but it's very doubtful anything will come up for that price. I kind of feel like we should wait until there's more inventory this summer. Originally the lendor told me our payment would be about $1395 per month for a $250,000 house including taxes and insurance. I wanted to know what he estimated the property tax to be (hasn't broken it down for me yet) because this house comes out to be $1600 a month.

A friend told me house shopping is fun. I'm not feeling it. Any advice?

Edited May 14, 2012 by MorningStar

[Storm Rider]

Buying a home is one of those significant experiences of most couples; it is the single, most expensive acquisition they will ever make. It is not difficult to look around and see people that are house rich and poor. They have purchased a home that is too much for their take home pay and it remains nearly empty because they cannot buy furniture.

Buy a home that fits within your budget. Don't attempt to consider your tax breaks; given the current US debt situation there will need to be some significant changes in the future; we all will pay more, and none of us really knows what that will look like.

Yes, you will find a home that meets your needs and one that you like. Sometimes you have to look harder, spend more time in the hunt, and broaden the areas where you look for homes, but you will find it.

Remember that you buy on today's income not tomorrow's income. The great thing is that as the economy turns around and your take home pay increases you will be able to afford a bigger home. While the enconomy rebounds your home's value will increase. When it is time, sell it and then move up to a bigger home and one that you can then afford.

House shopping is shopping. Some of us enjoy shopping and some of us don't. Whether it is fun or not is up to you; what you need to know is that this is where you should put forth the ultimate in effort to make sure you find exactly what you want without too much compromise AFTER you have a good understanding of what kind of homes are found in your bracket. Good luck!

[rpn]

Realtors want you to pay more for a house because their commission is greater (and lower cost houses tend to sell quickly without them). And for heaven's sake, don't make a real estate purchase decision based on tax breaks that may not even be there with a flat tax. (To see what I mean, ask the one who is telling you all that to give you a copy of the IRS information about the tax break they are telling you about. They aren't likely to do it because they know that you shouldn't rely on that sort of thing anyway.)

If the realtor doesn't want to help you look, then look yourself. There are plenty of homes being sold by owners and by banks. And get pre-qualified for a loan before you start looking. (But don't for a minute accept the banks idea of what you can afford. They aren't looking at the tithing you pay or the number of family things you do or the amount you save or spend on food storage , or any number of things in your lifestyle that are different from the norm.)

Edited May 13, 2012 by rpn

[Garden Girl]

Stick with your instincts, MS... don't be talked into another $400 per month etc etc. Things always cost more in reality and I'm afraid you'd get caught in a bind. You want this to be a positive experience... and when looking at houses it's easy to get caught up in the moment by the whistles and bells.

Don't forget, the "tax break" of deducting mortgage interest has come under fire just this last couple years like never before and talk has been of if not eliminating it at least reducing the % deductible. What if you give way to your realtor and go with his suggestions and then something happens with the taxes... or some other change in the economy that will affect you.

You should plan on what you can afford right now the way you have figured it out. I know you can find something if you take your time. With the housing prices the way they are, you should be able to find a place with better features within your price range. Maybe not everything you want, but close.

Remember all the related costs... if you pay "X" dollars, what if you have to build a fence or replace carpet, new furniture or window dressings, landscaping.. and a hundred other expenses that can add up... you don't want to be "house poor." If you are using every available dollar to make your mortgage/insurance/taxes on a home, where are the funds for vacations, etc.

No, I say you've got a good head MS... Don't let your realtor/lendor talk you into something you know in your heart is iffy...

I'm excited for you and know this can be a wonderful thing for your family...

GG

Edit to Add: My home is 19 years old... I've been in it 12 years and it's time to replace carpet in the living room. My cost is going to be $2700. And that's not for the most expensive, but a very good quality. It is a big chunk for me... these things happen in maintaining a home, particularly if you buy one that is not brand new.

Edited May 14, 2012 by Garden Girl

[MorningStar]

I thought there was also talk of getting rid of tax breaks for charitable contributions, so we might not even be able to itemize if that were the case. I'm so sick of realtors/lenders telling me what we can afford! This is our third time attempting to buy a house and they're still repeating the same old stuff about tax breaks and how your mortgage will never go up like your rent. Um, property taxes go up! Even though home values have dropped, I know lots of people have still had their property tax increased because the value of the property of itself has gone up. Huh?!

My friend just got this notice in the mail from her bank saying they could do a loan modification and give them a lower interest rate because they owed more on their house than it was worth - no fees or anything. Less than a month later, they got a notice that their property tax was going up $100 per month. It makes no sense, but my dad just told me their tax went up too despite their home being worth less than it was.

We have been in a two bedroom apartment for almost 10 years now. The thought of staying here longer makes me want to cry, but the thought of using all of our energy and time to pay for a house with lots of other things to consider terrifies me. Our realtor says we should take a leap of faith. I know it's going to be scary no matter what, but this is too much.

Edited May 13, 2012 by MorningStar

[thesometimesaint]

MorningStar:

Be VERY conservative with your money, and don't let anyone talk you into putting yourself in a bad money position.

Multiply your after tax present income by 3, and that is the MOST house you can afford. DON'T COUNT tax credits, refunds, or changes to the tax codes. DON'T COUNT on changes in hours worked, changes of jobs, increases in claimed dependents. DO COUNT added expenses for travel(Including possibly a new car), furniture, appliances, basic costs of living, increased maintainence in your new property over and above any you might have now.

If you can do all that and still afford the house then home ownership is one of the greatest things you can do for you and your family.

[Messenger]

I wouldn't buy a house in this market if it was half off.

[Calm]

Our realtor says we should take a leap of faith.

Remember the realtor is in the business to make money for himself, not to make sure you get the perfect house for you. He's not around to help you pay the bills if he sets you up with the wrong house.

Ask him to write into the contact a guarantee that if you can't pay the extra 400 a month if he is so sure it will work out, he will or get him to cut his commission (he can do that if he wants) by 9,600 to pay for the first two years of the $400....remember that amounts to almost $5000 more a year, it doesn't seem as much when you talk about it by month, but there are 12 of those a year....

Figure out how much more his commission is with the higher cost house...then figure out why he wants you to buy it.

Plus they make the same commission whether it takes months for you to find a house or days. Which do you think he'd prefer you to do?

Edited May 13, 2012 by calmoriah

[rpn]

Tell your friend that she needs to appeal the tax assessment that her home is worth more (though her property taxes can go up even when the tax assessor agrees the home IS worth less if that is what the taxing agency did). There is usually only a short time to do that each year.

[Messenger]

Buying a house is a big decision. A lot rides on employment, housing value, and what holds true in the market. I could tell you a housing story, but I would say that an investment, like the stock market or mutual fund, is just as important. So, here is a little story that I am happy to share. A few years back, just before the housing bust, It seemed that everyone was buying homes and if I waited too long, I would be priced out. I actually had saved up enough money for a decent down, but when I was just looking at a few condos, everyone was saying you dont have to pay anything down! At the same time I am a news hound, and I have an interest in the stock market. At one time, I had quite a bit of money in the market, and did quite well for myself. It seemed, when I was watching these experts, that they were saying there was a huge bubble going to burst in the stock market, and at the same time there were grumblings in the real estate market. So, I first went to Heavenly Father and asked if buying a house is right for me. I presented to him how much I had saved, what I was looking at buying, and even pointed out General Authorities that say buying a house is generally a good idea. The answer was clear, simple, and undeniable ... no. So, I didn't. I kept watching the markets and there were 1 or 2 guys on TV that I trusted, that were saying some pretty radical things. Then, a few weeks later, some of the things they predicted that would be serious signs of a collapse started to happen. So, I got on the computer, looked at my mutual funds and said a quick prayer if I should move these funds to something more safe. The answer was a resounding YES. So i did. The next business day the transaction of nearly my entire 401K was moved to a safe fund - which is like a bank account. That transaction was complete at 9am. Two hours later the market crashed, and I save nearly 25% of my assets. Further, 3 months later, I was laid off.

Does Heavenly Father inspire us on our savings and investments? Absolutely yes.

[Garden Girl]

Does Heavenly Father inspire us on our savings and investments? Absolutely yes.

That's like when I was buying my new car for which I had to pay cash because I couldn't afford payments. I took a minute and prayed because the model I was buying was more expensive that some, i.e., a Dodge Caravan vs a Ford compact. I didn't pray if it was the right color or model... but if the general transaction was good for me, if I would be all right going for safety/warranty features vs cheaper expense... I got a wonderful peace that flooded me that all would be well. So I bought the Dodge and all has been just fine 4 years later...

MorningStar... I moved into my little beach house in 2000 with property taxes at approx $1700. Today my property taxes have risen to $2275. They have gone up every year. Fortunately, so has the overall value of my home. But my monthly expense is still higher no matter what...

GG

[ERayR]

My husband and I have started house shopping and after looking at a house last night, our realtor and lender were trying to convince us that we could afford to pay $400 more per month than what we're paying now in rent because of the tax break. I know the tax break is helpful in a lot of situations, but I told them the concern is how we get that extra money now and we're in a low tax bracket. They said we could fill out a new W4 and change our deductions, but I'm looking at my husband's paycheck and even if it weren't taxed at all, that wouldn't equal a savings of $400 per month or even close. Some paychecks there isn't any Federal Income Tax withheld. I will also probably make double what I made last year teaching piano lessons and don't want to end up owing when tax time comes. We will also have to move out of the area and I will have to start over and find all new students. We can't pay all of our bills and rent with just my husband's take home pay. We need at least half of what I make to survive and the rest is going into savings right now so we can make this transition and have it for emergencies.

Our realtor says everything is going for over the asking price right now and is afraid we're not going to find anything else for this price, but we don't feel good about the decision. If it were in this neighborhood, it would probably be doable, but it's very doubtful anything will come up for that price. I kind of feel like we should wait until there's more inventory this summer. Originally the lendor told me our payment would be about $1395 per month for a $250,000 house including taxes and insurance. I wanted to know what he estimated the property tax to be (hasn't broken it down for me yet) because this house comes out to be $1600 a month.

A friend told me house shopping if fun. I'm not feeling it. Any advice?

It is only a potential tax break if you presently itemize deductions. Standard deduction for married filing jointly is $11,600. If your present total itemized deduction is less then that then subract present potential itemized deduction from the 11,600 then subtact that from the interesst you pay then multiply that by your presen tax rate. That will give you your tax savings. Then subtract normal upkeep items your landlord pays from your tax savings to give you your real savings.

Example:

You presently have church donations of 5,000 per year and no other deductions. With a house purchase you would have an additional 7,500 in deductions plus maybe 1,200 in property tax for a total of 13,700 in itemized deductions. Subtract 11,600 standard from that for a total of 2,100 in additional deductions. Multiply that by 15%(I assume you are in the 15% bracket) and you get a tax break of 315 dollars. Now if you have a water heater go out you probably don't have enough to replace it.

Don't buy a house for the tax breaks. Don't over extend yourself or you will end up hating the house and maybe even losing it if an emergency hits you. Unless you have a 3 to 6 monthes of expenses emergency fund saved don't even think about buying a house.

Now go do what you want but the advice I have just given is sound financial advice and usually cost at least an hours consulting fee but I offer it for free so take it for what it is worth.

[Calm]

Summer is a better time for buying as well, I believe, since more houses are on sale, probably have been on sale longer than in the spring and the owners are more likely to be willing to bring down the price a bit....so don't be pushed into buying something right now, take your time, you just started.

[MorningStar]

It is only a potential tax break if you presently itemize deductions. Standard deduction for married filing jointly is $11,600. If your present total itemized deduction is less then that then subract present potential itemized deduction from the 11,600 then subtact that from the interesst you pay then multiply that by your presen tax rate. That will give you your tax savings. Then subtract normal upkeep items your landlord pays from your tax savings to give you your real savings.

Example:

You presently have church donations of 5,000 per year and no other deductions. With a house purchase you would have an additional 7,500 in deductions plus maybe 1,200 in property tax for a total of 13,700 in itemized deductions. Subtract 11,600 standard from that for a total of 2,100 in additional deductions. Multiply that by 15%(I assume you are in the 15% bracket) and you get a tax break of 315 dollars. Now if you have a water heater go out you probably don't have enough to replace it.

Don't buy a house for the tax breaks. Don't over extend yourself or you will end up hating the house and maybe even losing it if an emergency hits you. Unless you have a 3 to 6 monthes of expenses emergency fund saved don't even think about buying a house.

Now go do what you want but the advice I have just given is sound financial advice and usually cost at least an hours consulting fee but I offer it for free so take it for what it is worth.

Thank you so much! We know now that we can qualify for a loan and that has given me peace, but I don't feel comfortable buying now unless we find an outstanding deal that really is what we're paying in rent. We have never itemized. I keep feeling like there will be more to buy later this summer. We'll keep saving and if nothing comes up, then maybe we'll have enough savings to rent a place in town while I continue to gain more students. I am so drained from the conversation I had with them as they tried to convince us the payment would basically be the same as rent with the tax break. It makes no sense for us.

[MorningStar]

I really appreciate everyone's input. I feel much more calm now. I couldn't even eat my breakfast in bed this morning because my stomach was in knots.

[BCSpace]

If financing this house requires tacking on PMI and you're going to have to scrimp and save to meet the mortgage payments anyway, I think it's better to scrimp and save for a bigger down payment that eliminates PMI. So if something happens that interrupts your scrimping, you're not stuck with a mortgage and when you finally get a mortgage without PMI, you might not have to scrimp anymore and waste hundreds of dollars every month on an insurance that doesn't benefit you in the least.

Saving for a bigger down payment like this for just a couple more years will still help greatly even without PMI; that is, if you can stand your apartment that long.

[ERayR]

Thank you so much! We know now that we can qualify for a loan and that has given me peace, but I don't feel comfortable buying now unless we find an outstanding deal that really is what we're paying in rent. We have never itemized. I keep feeling like there will be more to buy later this summer. We'll keep saving and if nothing comes up, then maybe we'll have enough savings to rent a place in town while I continue to gain more students. I am so drained from the conversation I had with them as they tried to convince us the payment would basically be the same as rent with the tax break. It makes no sense for us.

I can't stress too much "Do NOT buy a house for tax benefits". Do NOT over reach with payments. Keep them in your comfort range. There will always be unseen expenses. And a real estate sales agent is NOT your best friend no matter how much they try to make you think so.

Just keep your wits about you(my grandmothers words) and make sure it fits in all ways inluding financially. There are already too many home loans in trouble. Good Luck

Add: As BCSpace has said a couple of more years of saving can make a real difference. You might want to look at the get out of debt approach before you buy then you will be in a much better position to buy and maintain a home.

Edited May 14, 2012 by ERayR

[MorningStar]

We're going to do the VA loan so we won't have to pay PMI or make a down payment, but I either want a low payment or more in savings. We also got out of debt. Even our cars are paid off. Thanks for the good advice!

[katherine the great]

Follow your instincts. If you are so stressed over it that you can't eat, then wait. I think waiting until summer is a good idea for the reasons you listed. Now is a very good time to buy but it most likely will still be a good time to buy in a few months. Just be prepared to do loads and loads of paper work. Go ahead and start getting all your paperwork in order now and be prepared for about a phone call an hour from your loan officer requesting even more info and docs in the days before closing. It's a huge pain but worth it in the end.

[emeliza]

^{We told our realtor and lender how much we could afford. We figured out our budget and then did a bunch of those online mortgage calculators to determine how much we could afford for the mortgage, taxes and insurance so we always had a ball part figure when we were searching of how much we could afford monthly and how much a house would be selling for with the monthly amount in mind. It made it much easier.}

^{I wouldn't allow them to bully you, they always will, but owning a house is expensive. Since we moved in we have had to fix and replace things that with renting we never had to worry about.}

[ERayR]

^{I wouldn't allow them to bully you, they always will, but owning a house is expensive. Since we moved in we have had to fix and replace things that with renting we never had to worry about.}

This is a very important thing to remember. As I said before the Real Estate Agent is not your best friend, They represent the seller not you.

[MorningStar]

This is a very important thing to remember. As I said before the Real Estate Agent is not your best friend, They represent the seller not you.

Yes, they never include that in their charts and graphs about buying vs. renting. At least my husband is extremely handy, but materials can still be expensive.

[cinepro]

Lots of good advice in this thread, MorningStar. Probably the most valuable thing to remember is that you should never, ever take financial advice from a realtor.

Ever.

They are not financial planners, they are not accountants, and they are not trying to help you make a good investment or save money. They are trying to get you to buy a house. There are a lot of really nice and honest realtors out there, but in the end, you have to look out for yourself. They get paid when you sign on the dotted line, whether or not the decision leads you to financial ruin (and since they get paid based on the sell price, they actually make more if you make a decision that leads you to financial ruin!)

Also remember that even the nicest and most honest realtors can sincerely spout a lot of garbage when it comes to trying to sell houses. It's stuff they hear from their fellow realtors, and stuff that gets accepted without much thought. Like how, until 2007, housing values "never went down", so a lot of really sincere realtors convinced home buyers to make really bad deals based partly on this "fact." It sounds like this whole "deduction" push is another canard to pressure buyers into spending more than they otherwise would. Yes, there is a deduction, but as others have pointed out, it's not wise to include it in the equation for many reasons.

Frankly, other than having your realtor show you what houses are available, you should probably not believe anything they say. And if you ever really feel they are working against you or pressuring you into making the wrong decision, fire them and get someone else. Ultimately, Realtors are just one step behind Travel Agents on their way to irrelevancy.

Another option to strongly, strongly consider is to rent a house. If you can't find the right house at the right price to buy, you're better off renting. It will get you out of your apartment and give you some time.

And for good info on mortgages, check out http://www.mtgprofessor.com/

Good luck!

[MorningStar]

Thanks, Cinepro! These guys have been irritating on many levels. Realtor asked us if we have prayed about this decision.

1. Duh!

2. None of your business.

3. You're not clergy!

Seriously an inappropriate thing to ask and manipulative. He showed us exactly one house and was an hour late. We wanted to look at a short sale in the area and he brushed it off. I don't think he has done any short sales and we are in a good position to do that because we are month to month and can wait as long as it takes, so we need to find someone who knows VA and short sales. It's not very encouraging when you tell the realtor you don't have to pay PMI with VA and he says, "You don't? That's awesome!" You would think he would be familiar with that by now.

I had also casually mentioned to the realtor that it would be nice to live close to my parents because you never know how long they're going to be around - they're both having health problems. So he passes that onto the lender and he brings up, "If your mom got sick, think of how much gas you would save if you lived in the neighborhood vs. living there."

We only looked at one house and then the realtor says, "But your son says he's embarrassed living in an apartment." No, not embarrassed. He just wants more space and more privacy. I keep looking for affordable rentals, but they're way expensive. 3 bedroom apartments even go for $1500 or more per month and that would leave us saving no money to make our situation any better. Really frustrating.

[katherine the great]

This is a very important thing to remember. As I said before the Real Estate Agent is not your best friend, They represent the seller not you.

The seller's agent represents the seller. The buyer should have their own agent who represents them.