The following is a reprint of my column that appeared in Frontiers In L.A. magazine on July 22nd, 2010
Everyone seems to have an opinion on the current real estate market. Those opinions seem to differ based on who it’s coming from and what’s at stake for them. Those who aren’t anywhere near ready or able to buy love to smack-talk the market. They say everything is still way overpriced, and that things still haven’t stabilized yet. My neighbor’s brother’s church leader’s dentist’s cat said that anyone who buys now is crazy. However, those who have gotten their ducks in a row and are actively seeking to buy know that interest rates on 30 year mortgages fell to the lowest on record for the third week in a row on July 8, and that prices are lower than they’ve been in recent memory.
It amazes me that when it was a seller’s market, buyers were jumping through rings of fire to get their piece of the action, getting in over their heads, taking risky loans that would ultimately come back to haunt them, and offering sellers any insane amount of money that was being asked. Now, however, that things have cooled, and it really is a buyer’s market, people want to wait and watch and attempt to “time the market.” I’ve said it before and I’ll say it again. Know how you know when we’ve hit the bottom? Because we’ve started going back up.
Since I’ve started this column, I’ve had a lot of calls from people who were unsure exactly what they needed to be able to do if they really wanted to consider purchasing. The most valuable bit of information I give them is a quick primer on loan programs. A very common program with a lot of buyers now, and the one that provides the fewest barriers to entry for a buyer, is an FHA (Federal Housing Administration) loan. These loans are awesome. For qualified properties, a down payment of 3.5 percent of the purchase price of the property gets your foot in the door. For a $350,000 condo, that’s $12,250. There is also a fantastic loan program for teachers only called CalSTRS (California State Teachers Retirement System). With this one, you can get in for just three percent down.
Beyond that, I’m starting to see some lenders that can do five percent down loans for qualified borrowers who meet certain requirements.
The first thing a potential home buyer usually begins to sweat over (and believe me, you will sweat), is all of the expenses and new costs they have to acclimate themselves to after a purchase. But one thing that I find many buyers haven’t been educated on is the opportunities for savings that come with purchasing a home. There are many financial benefits you should know about. Here are a few that will add up to big savings come tax time:
1. $10,000 First-Time Homebuyers Tax Credit. As of May 1 2010, first-time homebuyers can receive up to a $10,000 tax credit (split over three years). The credit is available on a first come, first served basis, and will be offered to qualified California residents until the amount of credits issued reaches $100 million. This basically means a $3,300 write off of your California State Income Taxes for the next three years, beginning with the year you close escrow. (As a side note, there is also a $10,000 tax credit on new homes available to all homebuyers, not just first-timers. An individual may not have both credits though).
2. Points On Your Loan. When you as a buyer take out a mortgage, typically you can expect to pay between one and three points on your loan to the mortgage broker. A point is equal to one percent of the loan amount. Normally you shouldn’t expect to pay more than one point, but there are situations where you will pay more than one in order to secure a better interest rate (your lender can help determine if that’s the route for you). The point(s) you pay are fully tax deductible.
3. Mortgage Interest Write-Off. For most loans homebuyers take out, the majority of the monthly payment amount is comprised of interest—not much principal. Interest on a mortgage payment is a tax write-off, therefore whatever percentage of your monthly payment is made up of interest, that part is tax deductible.
4. Private Mortgage Insurance. Buyers who put less than 20 percent down on a purchase are required by the lender to pay for Private Mortgage Insurance. PMI is basically a financial guaranty for the lender against loss should the borrower default on the loan or walk away from the mortgage. Your PMI premium is tax deductible, subject to certain income restrictions.
5. Property Tax. Every home buyer has to pay property taxes on their property. This tax is paid twice yearly, and the annual amount is equal to approximately 1.25 percent of your purchase price. Often referred to as “real estate tax,” this amount is also tax deductible.
6. Home Office Deduction. If part of your home is used as a home office, or exclusively for business purposes, you may be able to take deductions for that too, such as repairs, insurance, depreciation, etc.
As with everything tax related, you’ll want to consult with your accountant on matters of tax deductions, but make sure you’re working with one who is well versed in real estate-related deductions.
All of these benefits available to homeowners can really add up, and it’s worth taking note when you’re calculating the real costs of owning vs. renting. My goal is to try to bridge the gap between the perceived difficulty in purchasing a home and the reality of how easy it can be if you’re qualified, have good credit and are ready to begin building your future. Real estate remains a great long-term investment, and there hasn’t been a better time to buy in the last ten years. If you or anyone you know is considering buying (or selling) in the near future and would like to meet with me to have more questions answered, give me a call or drop me a line!