The American dream of tax breaks

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According to the National Association of Realtors people buy houses because they get a mortgage interest tax deduction.

It is hard for me to see the American Dream of being about taxes especially when we consider that owning a home doesn’t always result in a tax break.

People that think they are getting the mortgage interest tax deduction often are not getting it.  To get the deduction a tax payer has to itemize. Those who itemize do so because their total deductions are higher than the standard deduction.

The average savings is $1,918 across all incomes, those who earn less than $75,000 per year typically save $800 or less each year by deducting their mortgage interest.

The mortgage interest tax deduction alone probably isn’t a good reason for a person of average income to buy the average priced St. Paul home.  The good news is there are plenty of other great reasons for buying a home.

Often people who buy homes do so because they want a place to live and they consider it an investment that could go up in value. It is even possible to buy a home and rent it out so that someone else pays your mortgage.

Rent of buy, it isn’t just about money

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Buying vs. renting is a personal choice and there are many factors to consider. Owning a home can mean being tied down to a location and the responsibility of making payments. Renters have more flexibility.

I recently read the comments on a friends Facebook page when she asked if she should rent or buy. The real estate agents who responded tended to be in favor of home ownership. I’ll admit I believe in homeownership and I even own a home but I don’t believe owning is the best choice for everyone.

A young professional may pay a steep price by staying put because of a house or from buying a house at the wrong time and having to sell it too soon. Making the long term commitment to owning a home at a young age may mean regretting the choice later on.

For some owning a home is a good choice. People who don’t plan on moving and who have children in school can own and build equity and then move when the children are grown. Owning a home is a way to build wealth. Owning a home free and clear and not having to pay a mortgage or rent is priceless.

Home ownership was the right choice for my family.  There is more to the buy and rent decision than money and it isn’t just about using a calculator to see which option costs more each month.

In the long term renting will cost more than owning. In the short term buying a house is more expensive. There are closing costs and the monthly costs are more than just the mortgage.

Preparing for a home inspection

If I were selling my own home and had an offer from buyers who wanted to have an inspection I would prepare my home ahead of time. Here are some of the things I would do:

  1. Remove the old parts the contractor left by the furnace or water heater the last time he was here because I know buyers and inspectors might read something into them.
  2. Make sure every light fixture in the house has a working light bulb in it. Inspectors may suggest a fixture isn’t working if the bulb is burned out.
  3. If I had a fuse box I would remove any old and all new extra fuses and put them away.
  4. Clean the surfaces of the water heater and furnace.
  5. Make sure all screens are on the windows.
  6. Make sure all windows open and close.
  7. Check under every sink and remove any buckets under sinks so that inspectors do not assume a past or present leak.
  8. Make sure all electrical outlets and light switches have covers.
  9. If extension cords are being used due to lack of outlets disconnect and remove the extension cords.

Some of the items I am mentioning will just help to keep the list of things the buyer might want addressed shorter.

Before putting an older home on the market is it s good idea to clean the outsides of the furnace and water heater. Spare parts or old parts from any repair job should be tossed out or put away.

Frankly some home inspectors don’t know what they are doing and others are excellent. There isn’t any licensure or even qualifications to be a home inspector in Minnesota.

Also see City of St. Paul Truth in housing Inspection 

Making a dumb house smarter

My house is old. Part of it was build in 1858 and the newer part may have been built as recently as 1860. Thanks to wireless technology dumb old houses can be turned into smart houses.

I have on of those smart thermostats that I can control with an app or by voice the Amazon Echo. I don’t have to be at home to know what the temperature is in my house or to change the temperature.

There is a camera in my house that can be activated by motion and it can send me an email alerting me that someone has entered my house. I can watch someone take my stuff using an app on my phone as I dial 911 and yell at them through a speaker.

A couple of weeks ago I made my home just a little smarter by purchasing some adapters for electrical outlets so that I can turn control the outlets with an app on my phone. Lights can be turned on and off or be set on timers.

The internet of things is here and there is a lot of useful technology we can use everyday, and much of it is so easy to instal that even a college graduate can do it.

Houses can be retrofitted for technology which is a good thing. My house probably did not have central heating or plumbing in the 1860’s but it was retrofitted with those amenities too.

Internet of things

Urban legends, mythology and the FHA loan

FHA loans have been an alternative loan for first time home buyers since the 1930’s. FHA stands for “Federal Housing Administration” Simply put an An FHA loan is a mortgage insured by the Federal Housing Administration.

The loans have advantages. Buyers only need a 3.5% down payment and there are other advantages. First time home buyers in particular should ask their lenders. The FHA loan might just be the best or only way to get the money to buy a house.

Buyers and sellers should not believe everything their real estate agent tells them about these loans. FHA appraisals are different than appraisals for other types of loans.

When a home buyer is getting a loan to buy a property the lender they are getting the loan from has to send out an appraiser to make sure the property is worth as much as the buyer is borrowing. The home becomes collateral for the loan.

The FHA appraiser determines the value of the property and also inspects it to make sure the it meets ” HUD’s minimum standards for health and safety” That kind of appraisal isn’t done for conventional loans. VA (veterans administration) loans also require a safety inspection as part of the appraisal process.

The FHA inspection is where much of the mythology comes from that surrounds these loans. I have had real estate agents tell me that all sorts of things will not pass an FHA inspection . . yet they do. If something does not pass an FHA inspection often a repair can be made so that it will pass. As a result home buyers sometimes do not make offers on houses they really want to buy, and sellers say no to FHA financing miss out on having the largest possible pool of qualified buyers.

FHA is not particularly picky about windows or the age of a boiler. They are picky about peeling paint that may contain lead and they will ask that a handrail be places along stairways. Leaky roofs won’t pass and neither will heating plants that don’t safely heat the house. Bedrooms must have egress windows and windows must open and close. While it is expensive to add egress windows it isn’t that big of a deal to repair a window so that it opens and closes.

HUD’s primary concern is the health and safety of the home buyer who will actually live in the house. Thus, most of their appraisal / inspection checkpoints have to do with health and safety aspects of the property. Above all, the home must be habitable and comfortable, without any potential hazards to the occupant.

HUD standards have changed over time but many real estate agents have not kept up. It doesn’t hurt to ask your lender or  read the guidelines. As a home owners myself I want my home to meet minimum safety requirements and would be inclined to make repairs for a new owner. After all we bought the house using an low downpayment FHA loan ad a forgivable silent second mortgage that helped with the closing costs.

The widening net wealth gap

Right now average monthly rents are higher in St. Paul than the average house payment, making owning attractive to many. It never ceases to amaze me the way a person can pay rent each month but not be qualified to buy a home and pay less each month but it happens.

Owning real estate is a strategy for building wealth. Homeownership takes planning. There are downpayment assistance programs and loans that require less than 5% down.

 

Net worth - NAR
Net worth – NAR