[swahili4courage]

Hello everyone. I'm new here and hope to get some replies. I hope this is the right place to post my tax benefit question.

I'm thinking of buying my first home; the property is in the Northern Virginia suburbs of Washington, DC and priced at $375,000. My total household income is about $8520 a month and I rent a townhouse for $1650/a month (the rent will increase to $1800 in a few months). Because of this, I think I should try to buy my own home. I am so tired of renting and would like to take advantage of the tax benefits of home ownership vs. throwing my money away in rent. Especially if I can pay a monthly mortgage payment (taking into account the tax benefits) that would be equivalent to what my monthly rent is ($1650) and the fact that my rent's going to go up to $1800 in a few months. Anyway, what would the cost/tax savings be, if any, should I buy this home? Is a 375K house out of my price range, when you consider what I'm paying in rent? If so, what WOULD be more equivalent to my price range, considering what I'm paying in rent? Assuming a 30-year-fixed, 7% rate (rates are going back up; I do not want to do interest-only), the mortgage alone would be about $2500/a mo. and probably about $2900/a year in taxes. I am in the 25% tax bracket. Please help, thank you very much in advance! :-) I am looking forward to your replies.

[Dr D]

Mortgage rates are currently below 6.5% for a 30 year fixed rate, with zero discount points and zero origination fee. I generally advise people to pick a rate without those added costs. I made the assumption that you would be able to put a minimum of 5% down payment and do a single 95% LTV loan. P&I: $2252 + PMI: $214 + Taxes: $242 + Insurance: $100 = $2808 PITI. Dividing that by your gross income results in a comfortable housing ratio of 33%. Yearly interest of $23,156 + Taxes of $2,900 = $26,056 tax deduction x 25% = $6,514 tax savings. Actually it would be a bit less because you are probably using the standard deduction, but with a house you would use the long form to pick up extra deductions to offset loss of the standard. 100% financing is available, but with less than 5% down FNMA charges you an extra 1.5 points. 80/20 (80% first + 20% second) and 80/15/5 loans are also available which enable you to avoid Private Mortgage Insurance and increase your interest deduction.

All things considered (tax savings, appreciation, the freedom to modify your abode), it would be a wise move to buy sooner than later. The only exception I can think of is, if you forsee a relocation in the short term (2-3 years). A downturn in the real estate market and selling costs could wipe out your savings. I hope that this helps.

[swahili4courage]

Mortgage rates are currently below 6.5% for a 30 year fixed rate, with zero discount points and zero origination fee. I generaly advise people to pick a rate without those added costs. I made the assumption that you would be able to put a minimum of 5% down payment and do a single 95% LTV loan. P&I: $2252 + PMI: $214 + Taxes: $242 + Insurance: $100 = $2808 PITI. Dividing that by your gross income results in a comfortable housing ratio of 33%. Yearly interest of $23,156 + Taxes of $2,900 = $26,056 tax deduction x 25% = $6,514 tax savings. Actually it would be a bit less because you are probably using the standard deduction, but with a house you would use the long form to pick up extra deductions to offset loss of the standard. 100% financing is available, but with less than 5% down FNMA charges you an extra 1.5 points. 80/20 (80% first + 20% second) and 80/15/5 loans are also available which enable you to avoid Private Mortgage Insurance and increase your interest deduction.

All things considered (tax savings, appreciation, the freedom to modify your abode), it would be a wise move to buy sooner than later. The only exception I can think of is, if you forsee a relocation in the short term (2-3 years). A downturn in the real estate market and selling costs could wipe out your savings. I hope that this helps.

Yes, it does help. I was considering a relocation at one point (to a lower cost area), but I thought about it some more, and decided to stay put in the DC/Northern Virginia area for at least another 6 years. Maybe even a little longer.

I used a 7% APR, because I won't be applying for a mortgage until Feb/Mar 2007 timeframe. I have a few goals I want to meet prior to my mortgage application (pay down some credit card bills, save up a little more $$$, improve credit scores, etc), and Feb/Mar 07 is when I will meet those goals. I think my strategy is the right one (getting credit/finances in order) PRIOR to applying for a mortgage. So, I just assumed a 7% rate would be about what the APR for 30-yr fixed in Feb/Mar 07 timeframe.

I am also a veteran (honorable discharge), so I guess I could look into VA loans, too. I understand those are with no money down. But I hear they have real strict guidelines. I'll have to look into that.. .

Thanks for your response, Dr. D. This would be a big step for me (buying a home), so if anyone else has something to add that would be helpful, that would be most appreciated. Looking fwd to any additional replies!

[Fr_Chuck]

If you income is over 8000 a month this home should be a easy buy if you have a proper budget on your other debts. So you need to look if you are paying way too much in credit card, too expensive car payments or more.

[swahili4courage]

If you income is over 8000 a month this home should be a easy buy if you have a proper budget on your other debts. So you need to look if you are paying way to much in credit card, too expensive car payments or more.

Thanks for the reply.

[Dr D]

Had I known that you were a Veteran, I would not have bothered with my first post. A VA loan is THE BEST one for you. What you have heard about their guidelines being stricter than Conventional is not true. They do however have minimum propery standards that must be met (you can't buy a fixer upper that is in sad disrepair). You can buy up tp $417,000 with no money down. VA charges a 2.15% (for first time use) VA Funding Fee that is financed. If you put 5% down the VAFF is reduced to 1.5%. The 5% down is most cost effective for subsequent VA loans where the FF is 3.3%. The cost of the VAFF is cheaper than PMI, and the interest rates are a bit better than for a Conv. Loan because the VA loans have greater servicing value. The VA uses a single ratio of 41%. That is: House pmt + all other loan pmts/gross income < 41%. VA also takes into consideration your family size; as they subtract from your gross, Fed, State, Local Taxes, FICA, house payment, loan payments, maintenance & utilities on new house, to arrive at a "Residual" left over for family support and expenses. The bigger the family, the higher the minimum "Residual". If you have any credit issues, start workig on them TODAY. First step is to get your report from all three bureaus. Check out the Veterans Administration Home Loan site. If you have other questions, don't hesitate.

[swahili4courage]

Had I known that you were a Veteran, I would not have bothered with my first post. A VA loan is THE BEST one for you. What you have heard about their guidelines being stricter than Conventional is not true. They do however have minimum propery standards that must be met (you can't buy a fixer upper that is in sad disrepair). You can buy up tp $417,000 with no money down. VA charges a 2.15% (for first time use) VA Funding Fee that is financed. If you put 5% down the VAFF is reduced to 1.5%. The 5% down is most cost effective for subsequent VA loans where the FF is 3.3%. The cost of the VAFF is cheaper than PMI, and the interest rates are a bit better than for a Conv. loan because the VA loans have greater servicing value. The VA uses a single ratio of 41%. That is: House pmt + all other loan pmts/gross income < 41%. VA also takes into consideration your family size; as they subtract from your gross, Fed, State, Local Taxes, FICA, house payment, loan payments, maintenance & utilities on new house, to arrive at a "Residual" left over for family support and expenses. The bigger the family, the higher the minimum "Residual". If you have any credit issues, start workig on them TODAY. First step is to get your report from all three bureaus. Check out the Veterans Administration Home Loan site. If you have other questions, don't hesitate.

You know I've heard that lenders usually use a guideline for deciding how much you can afford. I've heard that 3 times your annual salary is the guideline. So, for example, if you make $100,000 a year, then getting $300,000 is what you'll likely get (3 x $100,000/salary). To the best of your knowledge, or anyone else's, how true is this "guideline?" And, if this is true, you sure won't get a house for $300,000 45 minutes outside of Washington, DC, unless you want to live in a rough neighborhood. If this "guideline" is true, 3 x your salary sure isn't much. Any comments on this?

[Dr D]

Those old "guidelines" have not been in use for at least the last 23 years that I have been doing mortgages. The Debt to Monthly Income Ratios reign. Continuing on the VA path with your $375K purchase: $375,000 base loan + $8,062 VAFF = $383,062 total loan. At 6.5% 30 yr fixed = $2,421 P+I, + $242 Taxes, + $100 Ins = $2,763 PITI. Using your $8,520 monthly income, that would allow you to carry $730/mo of revolving & Installment debt, and maintain the 41 % DTI ratio. Also, that 41% is not cast in stone, and can be increased up to about 49 %, provided that you have a residual that is 120% of the required minimum. At your income level that should be no problem unless you have about 10 kids. If you chose to put 5% ($18,750) down, the VAFF would be reduced to $5,343, and the total loan would be $361,593, with a $2,285 P&I. Considering your tax bracket, it would make more sense to throw the 18.75K (if you have it) at revolving and installment debt. Remember that many factors are considered in approval of a mortgage, such as credit, ratios, job stability, cash reserves etc. I hope that I am not causing confusion with all of my numbers.

[swahili4courage]

Those old "guidelines" have not been in use for at least the last 23 years that I have been doing mortgages. The Debt to Monthly Income Ratios reign. Continuing on the VA path with your $375K purchase: $375,000 base loan + $8,062 VAFF = $383,062 total loan. At 6.5% 30 yr fixed = $2,421 P+I, + $242 Taxes, + $100 Ins = $2,763 PITI. Using your $8,520 monthly income, that would allow you to carry $730/mo of revolving & Installment debt, and maintain the 41 % DTI ratio. Also, that 41% is not cast in stone, and can be increased up to about 49 %, provided that you have a residual that is 120% of the required minimum. At your income level that should be no problem unless you have about 10 kids. If you chose to put 5% ($18,750) down, the VAFF would be reduced to $5,343, and the total loan would be $361,593, with a $2,285 P&I. Considering your tax bracket, it would make more sense to throw the 18.75K (if you have it) at revolving and installment debt. Remember that many factors are considered in approval of a mortgage, such as credit, ratios, job stability, cash reserves etc. I hope that I am not causing confusion with all of my numbers.

No, not confused. And I really appreciate your responses! Question, though. I came across a few rent/equivalent mortgage calculators on the Internet. Most of them say that you can take your current rent (or a rent amount you are comfortable paying) and use a formula to find out your equivalent mortgage. The formula was current rent x (your tax bracket + 1) = equivalent mortgage. So, if you are in the 25% tax bracket and your rent is $1650, then, using that formula, it would go: $1650 x 1.25 = $2062.5. That's saying my $1650 rent would be like paying a $2062.50 mortgage. If that's the case, maybe $375K is out of my price range, and I should look for a cheaper house. Have you heard of such a rent/equivalent mortgage formula before? Is this formula accurate?

[AtlantaTaxExpert]

That formula fails to factor in the $5,200 Stnadrd Deduction you get whether you own or rent. However, it is a good "rule of thumb" to use.

[Dr D]

Dear swahili4courage - All that I can provide are the guidelines that the various powers that be, such as FHA,VA, FNMA,FHLMC, as to the mortgage payment that a particular borrower may qualify for. The final determination of your eventual mortgage payment is your's to make, regardless of what any agency may say. You and your family must determine the payment that fits within your "comfort zone". Some households may be "house poor"; meaning that a disproportionate share of their disposable income goes to pay for a house. Other households spend less on a house and leave more money for vacations, music lessons for the kids, or hobbies etc. Everything in life is a trade-off, and only you can determine which things are most important to you and your family.

[swahili4courage]

Dear swahili4courage - All that I can provide are the guidelines that the various powers that be, such as FHA,VA, FNMA,FHLMC, as to the mortgage payment that a particular borrower may qualify for. The final determination of your eventual mortgage payment is your's to make, regardless of what any agency may say. You and your family must determine the payment that fits within your "comfort zone". Some households may be "house poor"; meaning that a disproportionate share of their disposable income goes to pay for a house. Other households spend less on a house and leave more money for vacations, music lessons for the kids, or hobbies etc. Everything in life is a trade-off, and only you can determine which things are most important to you and your family.

Absolutely! Again, thanks for your comments.