Nolo's Essential Guide to Buying Your First Home (6 page)
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Authors: Ilona Bray,Alayna Schroeder,Marcia Stewart
Tags: #Law, #Business & Economics, #House buying, #Property, #Real Estate
BOOK: Nolo's Essential Guide to Buying Your First Home
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While it may be too soon for you to imagine selling your first home, another important benefit is available if and when you do. Thanks to the Taxpayer Relief Act of 1997, you don’t pay capital gains tax (usually 15%) on the first $250,000 you make on the place. Double that to $500,000 if you’re married and filing jointly, or to $250,000 per person if you co-own the place. To qualify, you usually must have lived in the home two out of the previous five years before selling. Many first-time buyers use this tax break to move from modest starter homes to roomier homes that cost more.
Personality and Pizzazz: Your Home Is Your CastleIf you’ve always been a renter, you know the drill: Things stay the way they were when you moved in. White walls stay white, ugly carpeting stays ugly, and funky bathroom light fixture stays funky.
When it’s your home, you get to make your mark. There’s just no way to quantify the psychological advantage of personalizing your space.
Even people who’ve never taken an interest in home decorating, repair, or gardening find themselves hooked on the creativity and self-expression possible with home projects.
No More Mr. Roper: Say Goodbye to RentingExpressing your personality isn’t the only advantage to leaving rental living behind. Say goodbye to things like waiting around for things to get fixed, wondering whether the landlord will raise your rent or kick you out anytime soon, and being surprised by landlords who stop by at their own convenience.
Even reasonable landlords who make prompt and thorough repairs and never raise the rent can pull surprises or sell the property. Owning your own house reduces the stress and uncertainty of renting. You’re in charge of when you move on, who comes in the front door and when, and what gets done to the place. While that means you’ve got some extra responsibilities, you’ve definitely got some extra security and benefits, too.
The Future’s So … Expensive!If you pay $1,000 in monthly rent now, approximately how much will you be paying in 40 years, assuming average inflation (4% per year) and no rent control?a. $2,500 b. $3,400 c. $4,800 d. None of the above, because I’ll own a home.Answer: c or d.
Make monthly payments to myself, not the landlord.
At age 25, Talia had only toyed with the idea of buying a house—she’d thought that, despite her full-time job, it was financially impossible. But then her landlord raised the rent. Talia says, “I looked into loan options—and to my surprise, I qualified. Within two months, I bought a converted first-floor apartment with a little patio, in a safe neighborhood. I love not having to share a washer and dryer with other people anymore. But even better is the feeling of independence of having my own place: Because I’m building equity, I like to think I’m making those mortgage checks to myself—and they’re not that much higher than my rent checks were, plus I can claim some significant tax deductions.”
You Can Do It … If You Want ToAt age 25, Talia had only toyed with the idea of buying a house—she’d thought that, despite her full-time job, it was financially impossible. But then her landlord raised the rent. Talia says, “I looked into loan options—and to my surprise, I qualified. Within two months, I bought a converted first-floor apartment with a little patio, in a safe neighborhood. I love not having to share a washer and dryer with other people anymore. But even better is the feeling of independence of having my own place: Because I’m building equity, I like to think I’m making those mortgage checks to myself—and they’re not that much higher than my rent checks were, plus I can claim some significant tax deductions.”
Are you still on the fence about homebuying? Some people just don’t feel ready to take the plunge. Below are a list of common “I can’t do it because . . . ” excuses. Don’t get us wrong: Not every excuse is a
bad
excuse. You just need to know whether yours are based on solid facts rather than plain old fear.
“But … I Like Renting”bad
excuse. You just need to know whether yours are based on solid facts rather than plain old fear.
Maybe you’re thinking,
I really love my apartment
or,
I’m getting such a good deal
. But even if your current rent seems cheap, cheap is never as good as free. Yes, we’re aware that buying a house isn’t free. But at some point, you won’t be paying a mortgage anymore. That will
never
be true if you rent.
I really love my apartment
or,
I’m getting such a good deal
. But even if your current rent seems cheap, cheap is never as good as free. Yes, we’re aware that buying a house isn’t free. But at some point, you won’t be paying a mortgage anymore. That will
never
be true if you rent.
CHECK IT OUTRun your own numbers.
These calculators compare the costs of renting and buying:•
www.myfico.com
(click “More Credit Calculators,” then “Am I better off renting?”)•
www.nolo.com/calculators
(click “Should I rent or buy?”)•
www.ginniemae.gov
(under “Homeownership,” click “Buy vs. Rent Calculator”). While you’ll need to guess how much you’ll spend on a home to use these calculators, the result will at least give you a rough comparison. Revisit the calculators after you’ve looked at Chapters 3 and 6 (covering the financial details of buying a house).
All that being said, renting might be best in the following situations:
“But … I Can’t Afford It”•
You plan on moving from the area within the next few years.
Buying is a long-term strategy, with some significant up-front costs. Plus, it’s easier to move out of a rental than a home you own—selling is almost as complicated as buying.
•
You need flexibility.
Buying is best for people whose lives are fairly stable. If your first priority is being able to quit your job any time a friend proposes a round-the-world sailing trip, maybe homeownership will feel more like a trap than a positive step. (Then again, we’ve met travelers who’ve sublet their house and supported their travels with the rent payments!)
•
You expect your income to decrease soon.
If you’re planning to return to school or quit your 9 to 5 to pursue an acting career, you might not want to lock yourself into a mortgage. Still, you may be a potential homebuyer if you can afford something more modest within your anticipated future income or can pay the mortgage by co-owning the property or taking in renters.
•
It will cost you far more to buy than to rent.
Run those numbers, using calculators like the ones listed above. In some markets, home prices have risen so dramatically that you can still rent for much less than you can buy—even after you factor in tax deductions and inflation. If that’s the case, you might be better off renting and investing elsewhere.
Maybe your main reservation about buying a home is that you simply can’t afford one. Scraping together a 20% down payment can be no small task when you’ve already got your plate full with your current bills. Or perhaps you’re afraid you won’t qualify for the gigantic loan you’ll need or won’t be able to pay it once you get it.
Focus on the spaghetti.
Caryn and her husband Alec were stretching to their financial limits to buy a house, and Caryn says, “We were nervous, but our agent told us, ‘You’ll just need to eat spaghetti for about a year, and then things will even out.’ For some reason, that image stuck in my head, and I thought, okay, I can handle eating spaghetti for a while. In fact, that’s about the way it worked. The first year, we depleted our savings, not only with the house closing but with repainting and buying furniture. Now we’ve settled in, and owning a home doesn’t feel like such a big load on our shoulders anymore.”
Caryn and her husband Alec were stretching to their financial limits to buy a house, and Caryn says, “We were nervous, but our agent told us, ‘You’ll just need to eat spaghetti for about a year, and then things will even out.’ For some reason, that image stuck in my head, and I thought, okay, I can handle eating spaghetti for a while. In fact, that’s about the way it worked. The first year, we depleted our savings, not only with the house closing but with repainting and buying furniture. Now we’ve settled in, and owning a home doesn’t feel like such a big load on our shoulders anymore.”
If you’re trying to get a down payment together and finding your efforts frustrated, don’t lose heart. There are alternatives: For example, you may be able to augment your down payment with a loan from a family member, or even enter into a cobuying arrangement with a friend.
As for the mortgage payment, people who think they can’t afford it often focus only on the big number—the five, six, or even seven-digit figure that says what a house is going to cost. But a mortgage allows you to spread that number out over a big portion of your life. Finally, let’s not forget that the first home you buy isn’t necessarily going to be the one you’ll live in forever. By remaining flexible, and starting with a not-quite-perfect house, you can break into the housing market. That’s why they call it a “starter” house—it’s only the beginning. The equity that you accrue may very well help you get into that next place.
Small Can Be BeautifulIf you think living in a small space means you’ll be cramped, uncomfortable, and aesthetically disappointed, check out
www.apartmenttherapy.com
. Under “house tours,” your secret voyeur can look at tiny spaces other people have transformed into fabulous homes. Be inspired!
Some people are reluctant to buy a house because they’re single. But did you know that more than one-fifth of homebuyers today are single women? Obviously those women have figured out that there’s no secret rule that says only couples get to buy houses.
Invest in my present as well as my future.
Real estate agent Joanna knows about not wanting to buy a house as a single woman—she’s seen it in many of her clients. But, says Joanna, “The problem with waiting to do something the traditional way is, what do you lose during that waiting period? I was in my early 30s and ready to have a place of my own. Plus, it makes sense to spend the money and get a tax write-off rather than pour it into rent. This isn’t to say that buying alone wasn’t stressful—I stretched financially to make it work. But since buying, my house has gone up in value and continues to do so.”
Real estate agent Joanna knows about not wanting to buy a house as a single woman—she’s seen it in many of her clients. But, says Joanna, “The problem with waiting to do something the traditional way is, what do you lose during that waiting period? I was in my early 30s and ready to have a place of my own. Plus, it makes sense to spend the money and get a tax write-off rather than pour it into rent. This isn’t to say that buying alone wasn’t stressful—I stretched financially to make it work. But since buying, my house has gone up in value and continues to do so.”
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