Moving to the USA, Buying a Home in the US, Mortgage Financing, Renting a Home in the US
December 30, 2018
For anyone living in the US, having good housing is really a major milestone. However, living in a good house primarily results from good planning and flawless decision-making. Is it better to buy or rent a house? Sometimes the answers to this question are based on personal perceptions. Generally, the following are the fundamental factors you should consider when deciding whether to buy a house or continue renting.
How long you plan to live in an area
Your income tax situation – such that you will benefit from deducting mortgage interest and property tax
Home appreciation – how is the variation in home values in the area for the last two or three years?
Your cash satiation – will your plan exhaust all your available liquid cash?
Let us look at each factor in detail.
How long you plan to live in an area
Since the cost of buying and selling real estate in comparatively high in a short-term, real estate works best as a long-term investment. Consequently, it is best to buy a house if you are planning to stay for a period of not less than 5 years. This is because the resale price will take quite a long time to get to the break-even point. Otherwise, the resale value may just be a loss, considering the costs of buying that includes title insurance and lender fees for buying.
For instance, if you buy a home for $300,000, the closing costs can easily run to $6,000 or more. After selling, hopefully at a higher price, real estate commissions alone will amount of 5%-6% of the sales price. This shows that a good increase in value will take time to get to the break-even point. Evidently, this is unlikely to happen in one or two years.
Your tax situation
According to the US tax policy, it is allowable to deduct mortgage interest and property tax paid from an income tax return. This can reduce the amount of taxable income and as a result reduce the amount you owe IRS in taxes. This cannot apply if mortgage interest, property taxes and anything else you can find to deduct do not exceed your Standard Deduction. For 2018, the standard deduction was $6,350 for singles and $12,700 for a married couple filing jointly.
If your listed deductions exceed the Standard Deduction, you will gain measurable tax savings from home ownership. If your itemized deductions are less than the Standard Deduction, you will get no year-to-year tax benefits from home ownership. Buying a home is a huge benefit, especially with mortgage financing.
Home appreciation
Most notably, real estate values have been recovering since the mortgage crisis. Some states have seen tremendous increases. Checking with a local Realtor or doing research online will give you an idea of what home values are doing in your area. An annual increase of about 3% per year implies that a home bought for $300,000 today could bring close to $330,000 in three years.
Even with real estate commissions accounted for at the end, that is a decent growth in your equity. Past performance of real estate can give you at least some idea of what is likely in the future. If the forecast is in your favor, why would you not opt to buy?
Your cash situation
Purchasing a home involves a considerable amount of cash even when you are making an installment payment. Costs can change from one area to the next, but it is not strange for closing costs to be more than the down payment. For instance, a buyer who puts 3% down on a $300,000 home could expect to pay $9,000 down payment. In addition, one pays another $11,000 for closing costs. Notably, these are not just the cost of lender underwriting fees, Title Company and lawyer fees. They are items you pay in advance. These costs may also include your first-year homeowner’s insurance policy and pro-rated interest.
If you may not have sufficient cash flow to cater for all these items, buying a home will obviously become daunting. The most viable solution, perhaps in for a short-term, would be to rent. The main point of this is to be conscious of your cash situation. It is always prudent to keep some money available for emergencies and other unforeseen happenings. A buyer who uses up every penny of available cash for down payment and closing costs could find himself or herself incurring debts later.
In conclusion
There are experienced advisors out there ready to help you make the ideal decision concerning buying or renting a home. Mount Bonnell Advisors are highly recommended by many for excellent guidance to people when acquiring a home in the US. Please feel free to contact us for help.