Vail Daily column: Understand the costs, benefits of owning a home
The Mortgage Guy
A recent study by Eagle County demonstrated what most of us already know — it’s dang expensive to live up here, even for households that have a six-digit income.
I agree with the gist of the study and don’t dispute there is a problem, but there is a little more to the cost of owning a home, and there are tradeoffs in everything.
There are a lot of angles to consider if you should buy a home or not. While the costs are the costs, sometimes it’s pay yourself and your lender vs. pay the government and the landlord. Sometimes I feel I have a moral dilemma in that I know I can probably get someone qualified for a loan, but in looking at their lifestyle and spending habits, I know they are going to have to make some tough decisions in the future to be able to make the payments. Something will have to give at some point; they may have to give up some of their toys, vacations and nice cars.
When I sense this will be the case, I encourage them to think long and hard about taking on a mortgage commitment and try encourage them to look at the impact on their cash flow and if, for example, buying costs $10,000 a year more than renting, what would they be willing to have given up in the last year that cost them $10,000?
Part of the equation of renting vs. buying though that soften that blow are the tax benefits of owning a home. A homeowner gets to deduct his mortgage interest expense and his property taxes. On a $400,000 mortgage at 4.125 percent, your mortgage payment would be $1,938.60 per month. Of that, about $1,300 a month will go to interest payments and the balance of $638 will go to paying down the principal. The $1,300 is a tax deduction if you itemize as well as your property taxes, so if your taxes were $2,500 per year you will end up with a $18,000 tax deduction. That should save you several thousand dollars a year in income taxes, which would effectively lower your out-of-pocket costs. You can work with your employer’s payroll dept. or your tax person to estimate how much you might save in taxes and adjust your withholding exemptions accordingly so you have more take-home pay every month to help with that house payment. Over the years the scale tips and more of your payment goes to principal each month, usually after about 7-8 years about half of it is going there.
As far as a down payment, plan on 5 percent of your purchase price as a minimum. There is one program that allows for 100 percent financing, but there are a lot of qualifications and it’s hard to qualify for. Among other things you can’t make too much money, which a lot of people here do even though they consider themselves solidly middle class.
If you are buying a single family, duplex or town home you might want to check out a Federal Housing Administration loan, that allows for a much lower income level than a conventional loan. Federal Housing Administration loans have a lot of good and bad points, so a good heart-to-heart with your lender is called for to discuss the costs of the mortgage insurance and if a Federal Housing Administration loan is really what you need. Federal Housing Administration loans do allow for three percent down, as well. Federal Housing Administration loans will not work for buying a condo in Eagle County as none are Federal Housing Administration approved.
In some cases, your loan closing costs can be financed into the loan amount, but that is a little tricky to do and you need to explore with your lender if that will work for you.
One aspect of the County’s study I found interesting was that it was based on a family spending 30 percent of their income on housing. Mortgage industry standards generally allow for up to 42 percent of the family income to go to minimum payments on all fixed obligations with no specific percentage allocated to the housing expense. Federal Housing Administration loans allow up to 50 percent. Also, it appears the county did not factor in the impact of property taxes, insurance and home-owner association payments, if any. Property taxes can vary hugely and are something to compare along with the layout of the kitchen and condition of the carpet. Some areas, such as Eagle Ranch, will have double the property tax levies of a similar property in Edwards or Avon. That could equate to difference of a few hundred dollars per month, and that all goes into the cost of owning a home vs. renting.
There is also the question of real estate cycles property appreciation. There is no question real estate is cyclical, and the value will go up some years and down some years. In the last 37 years I’ve lived here we’ve been through several boom and bust cycles. But when I think of that little duplex in Sandstone I bought in 1986 for $150,000 that I wish I had kept, or that vacant lot in West Vail I paid $40,000 for in 1990, there’s no question the long term trend is up. We may not see the annual double digit growth we saw for years but if you buy for the long haul you should make money.
Still, much needs to be done to assure we have a affordable housing stock for our local families who keep the place humming. I’ve always maintained someone is far more interested in doing their job really well and progressing in their career once they have a mortgage, and that leads to better service and guest experiences, and just makes the valley a nicer place to live.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and can be reached at 970-748-0342. He welcomes mortgage-related inquiries from readers. His blog and website is http://www.mtnmortgageguy.com.