How can I afford to buy a home?! Alas, money doesn’t grow on trees. But there are ways to make it materialize rather magically. This is Part 1 in my series to show you how.
Give yourself a raise
To begin to answer the question, “How can I afford to buy a home?!”, you need to make a paradigm shift to giving yourself a raise. Now, go with me on this…
Let’s start with a basic premise regarding income. Where the rubber meets the road is: It’s not what you EARN, it’s what you get to KEEP.
Basically, we’re talking about how much you have to pay Uncle Sam in taxes. So logically then, it follows that having more tax write-offs yields you more income. Just ask The Donald. He’ll be happy to reiterate his very smart, tax write-off prowess. Mr. Trump built his empire via real estate by, ”taking advantage of the Tax Code”. And so can you.
Tax Deductions You Can Bank On
When you own your home as opposed to renting, it’s like giving yourself a pay raise. You are able to deduct $$$ against your federal income tax bill at the end of each year, thus keeping more of your hard-earned money in your pocket.
~ You’re allowed to reduce your taxable income by the amount of interest paid on your mortgage loan each year
~ You can deduct your real estate property taxes
~ Depending on the type of loan, it’s possible to write-off mortgage insurance premiums too
~ Interest deductions may also be taken on home equity loans
For illustration, here is a typical client who recently bought a $300K-ish home on a 30-year fixed loan.
(The mortgage interest and property taxes are elements of your monthly payment known as PITI or Principal, Interest, Taxes and Insurance. You receive a statement at the end of the year that breaks this out for tax purposes.)
Once you tally the total nut you paid, you then multiply your total deduction by your tax rate/bracket. My client and her husband are in the 28% earnings tax bracket, so they reduced their Uncle Sam bill by $3,522! ( 12,577 X 28% tax bracket) See below to find your tax bracket percentage based on how much you earn.
If you can Afford to Rent, You can Afford to Buy
Extrapolating further, this couple has effectively gained $293 of income per month ($3521 divided by 12 months). That didn’t happen when they were renters.
Even though they are paying a couple hundred dollars more monthly to own, over what their rental payment was, it is more than offset by cash savings from tax benefits. You can afford the monthly nut to buy a home after all! It’s a net gain. Homeownership with a mortgage is absolutely the best tax shield for everyday people out there.
Other tax benefits as time goes by…
As time goes by and you decide to make upgrades, there are also many local, state and federal energy-efficiency related tax credits. The federal Nonbusiness Energy Property Tax Credit lets you claim a credit for installing energy-efficient home systems. Tax credits are especially valuable because they let you offset what you owe the IRS dollar for dollar, in this case for up to 30% of the amount you spent on certain upgrades (even labor/installation costs).
And don’t forget the fundamental notion of why owning trumps renting… because of building equity over time. Every time you make a mortgage payment, you are paying yourself, not a landlord. Building equity in your home is a ready-made savings plan. And when you sell, you can take up to 250,000 ($500,000 for a married couple) as gain without owing any federal income/capital gains taxes also!
If you want a yard for the kids, fur babies, or an outdoor garden, or just hate schlepping your garbage to a distant dumpster, then I hope I’ve helped you to make a mental shift to making home ownership happen.
This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice; tax laws may vary by jurisdiction.
Roll through to the rest of my series: “Why Should I Buy a Home vs. Rent?”; “Show Me the Money to Buy a Home!”; “The Benefits of Buying New-construction Homes vs. Pre-owned”; “All About Boosting Credit Scores” and “What is Debt-to-Income Ratio?”
“So, who can help me with all of this?, you may be asking. Someone who specializes in homeownership subsidies and mortgage assistance programs– certified in course training.”
Not all Realtors are created equal, a la car mechanics or hair stylists. Many don’t have all the tools in their toolbox. They operate with the only the basic skills of their craft. Many cut corners. Like Realtors® who choose to easily line their pockets by dealing with only flush clientele and high-priced homes.
Think of me as, Gina, your New Home Guru. More Savings. More Living. I am more motivated and able to do a great job to help you affordably own your next home. If you want to own a home in the Austin area, reach out.
Pull the trigger, you’ll be glad you did. I will show you the money!