Wednesday, March 22, 2017

First-Time Homebuyers: How Your Mortgage Will Affect Your Personal Finances

When you're used to paying rent every month, it can be easy to think of a mortgage as more of the same: a monthly expense for housing. 

The truth is a mortgage can affect your personal finances in many ways that rent cannot, including saving up for your down payment and closing costs, ongoing maintenance and repairs, and your tax liability. 

Also as a renter, you are usually not responsible for any major updates and repairs. As a homeowner though, you will also be financially responsible for any home updates and repairs for the duration of your homeownership. Here's what you should know.

Saving for a Down Payment

The best way to clear your path to homeownership and keep your loan payment affordable is saving up for a down payment. 

If you choose a conventional mortgage, you will need a down payment of at least 20% to avoid private mortgage insurance (PMI) in most cases. PMI is a type of insurance that protects the lender if you default and it can add $150 or more to your payment. 

With an FHA loan, you will need a down payment of at least 3.5%, but you will need to pay two mortgage insurance premiums (MIPs) if you put down less than 20%. 

The upfront (MIP) of 1.75% is due at closing while the annual 0.85% MIP is automatically added to your monthly mortgage payments for the life of your loan.

If you don't have much saved for a down payment, a USDA mortgage may be a good option, according to USA Peak Loans

This loan option is designed for low to moderate income buyers buying in "rural" and suburban areas. USDA mortgages do not require a down payment.

Budget for Maintenance Expenses

For first-time buyers, one of the most overlooked costs of buying a home is the cost of maintaining the house. 

Expenses like lawn care, trash removal, plumbing repairs, and roof replacement add up over time. According to the Las Vegas Review-Journal, the average $350,000 American home costs $1,126 per month to maintain -- although this includes homeowner's insurance, property taxes, and utilities. 

A good rule of thumb is budgeting at least 1% of your home's value per year to spend on general maintenance and repairs like plumbing leaks, HVAC servicing, and roof repairs.

Owning a Home Can Offer Tax Breaks

While this may not affect your day-to-day budget, buying a home and taking out a mortgage can offer many tax breaks not available as a renter. Owning a home can reduce your tax liability in the following ways:
  • Mortgage interest deduction, which is especially beneficial with new loans as the interest payments are higher 
  • Mortgage points deduction 
  • Mortgage Credit Certificate Program allows you to get a tax credit (not deduction_ worth up to 30% of the interest you pay every year. This program is available from many local and state governments for lower income first-time buyers. 
  • Real estate tax deduction 
  • Tax-free IRA withdrawals for first-time homebuyers to avoid the 10% penalty normally applied to early withdrawals 
  • Deduction for interest on home equity lines of credit (HELOCs) and home equity loans to finance home improvements 

A home loan can affect your finances in many ways, both good and bad. It all comes down to how well you manage your finances each month. And hopefully you didn’t buy a home with a mortgage payment that you can’t afford in the long run. 

While owning your own home means being solely responsible for the property taxes, maintenance, and repairs, your mortgage can also be the gateway to better credit, tax breaks, and financial stability.

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