If July is a celebration of our national “home,” then June is a celebration of our respective “castles.” For more than 20 years REALTOR® associations from coast to coast have observed this month as National Homeownership Month. Since the home is likely to be the largest asset most of us will have throughout our lives, these four walls are an important contributor to your personal wealth. Though, we at O’Donnell, Ficenec, Wills & Ferdig appreciate that the ability to secure a home within one’s budget is most certainly not without its challenges.
Here, we provide suggestions for those with an eye on homeownership. So, you don’t get in over your head in a challenging inventory environment for homes within certain coveted price points. We also share insights into ways to save on the costs of owning and maintaining a home for those who are already in their dream place (or just their ideal place for now), as well as for those who are transitioning from renting and want to get off to the best possible start on their journey through healthy, happy “homing.”
Savvy savers and home-seekers
As the median home price surged past the $400K mark in the pandemic-driven seller’s market, the thought of a downpayment alone could be enough to send even the most level-headed home-shopper into a meltdown. While there has been some cooling in pricing in recent months, the closed price in our “home region” as of the most recently-available figures from April 2023, sits at around $298,000. This is still up by 6o% over pre-pandemic figures of ~ $186,000 reported by the Great Plains Regional MLS in April 2019.
Furthermore, competing financial obligations have been further muddied up by the increased costs of, well, seemingly everything. There remain some savings “truths” that are particularly relevant for burdensome (yet thankfully always fleeting) environments.
The “right” way to pay down debt – and, yes, there is a right way! – If the balances are spread over more than one card, familiarize yourself with each of your card’s respective interest rates. When you step back and strategize in this manner, you may be surprised by how high the interest is on some of these cards. Furthermore, pay attention to the fine print in your statements. Card companies are adjusting to even higher interest rates to account for “market conditions.” We encourage you to zoom in on the higher interest rate card first. Make it a priority to pay that card off first. Then, turn to the card with the next-highest interest rate, pay that one down and so forth.
Make things right for the future. “Shop” for cards with lower interest rates. These may be cards that are with the same company and for which you are already “pre-qualified.” Opting for these cards may help to avoid the hit to your credit score associated with inquiries when you borrow. Similarly, you’ll want to minimize any actual credit card applications that would be characterized as a “hard inquiry.” Too many such queries can damage your score. Also, consider balance transfers. The savings you get by transferring the balance on your higher-interest rate card to a card with a 0% introductory rate or a comparatively favorable rate should outweigh the fee to initiate the transfer process. Crunch the numbers and see what will work in your benefit. As the debt goes down, you can then parlay the savings toward the “home buying bucket.”
Secure the added, mortgage-oriented benefits. Paying down your debts trickles down to the home-buying process in more ways than one. With a more favorable debt load or debt-to-income ratio, you will be in a position to qualify for a loan with better terms. You can also put more money toward your down payment. These strategies can save you a considerable amount of money over the long term when you are locked into a mortgage with a less burdensome rate. There are numerous calculators online, whereby you can see this savings in action and even tinker with the numbers yourself.
Resist the urge to tinker too much with your “nest egg.” By that, continue to make the most of your employee benefits; notably, your 401 (k) – especially if your employer offers matching. Do not be tempted to dip into your retirement, either, as you may be then be subject to costly penalties for withdrawing funds early.
Additionally, resist the temptation to end up with “too much house,” or a house that you simply cannot afford. Due to the dearth of homes that may be in your price point, it may be easier for you to look up -- to more expensive homes in a higher price bracket -- rather than to look downward to more affordable ones. This can be disastrous. Have we already forgotten the subprime mortgage collapse that preceded the collapse in general? While an oversimplification of the complexities associated with the 2007 financial implosion, one notable feature of the crisis was the notorious “balloon payment.” These mortgages resulted in buyers ending up in homes they ultimately couldn’t afford, because of the attractive initial payments. Troubles ensued as the payments ballooned over time and the borrowers could not afford the heftier financial obligation.
Remember: Just because you are technically pre-approved for a certain amount of house, does not mean you should max that number out. It’s generally advised to stick to the “28-36 rule,” which means that each monthly payment should not exceed 28% of your gross monthly income. The total debt, too, should not be more than 36% of your income. This is the “golden ratio” when it comes to what mortgage brokers look for from prospective borrowers. Go over these percentages, and the financial strain is likely excessive (not to mention the risk of default and foreclosure).
Congratulations! Whether you are in your first house, step-up dream home or down-sized digs, you have overcome the obstacles that stand between renting and owning. Now, due to work changes and/or notorious inflationary challenges, you are looking for more cushion in your budget, or more breathing room to incubate that nest egg. Refinancing is often the “go-to” when existing owners and borrowers seek out ways to save on their monthly mortgage payments. It may be an appropriate channel for borrowers who are also looking to:
Lift burdensome interest
Accelerate the payment process (by shortening the loan length)
Change from an adjustable to fixed rate
Cancel PMI (private mortgage insurance)
Free up cash for other costs
Changing your loan terms in this manner may be appropriate for those who have built up sufficient equity to, for instance, drop PMI. In doing so, you can save over the longer term. While there always exists the possibility of changing the seats on the bus (renting out excess square footage or Airbnb’ing) or changing the bus itself (moving to a more affordable area), you can find savings without making dramatic life changes. After all, happiness with your situation is priceless. Take a hard look at:
Property taxes – We all know how these obligations can add up. You may have a basis to appeal or challenge the current assessed value of your home. Naturally, you will need to go through a process (with supportive documentation) to make your case and to validate an adjusted property value.
Consider cost-saving upgrades – There are two-fold areas for opportunity here. Number one, you could save considerable monies over the life of your home by integrating everything from energy-efficient lighting to HVAC. Two, you may uncover excessive waste and inefficiencies in how your home runs as part of an energy audit. Some “fixes” require little investment upfront – things like identifying lesser-used leaky faucets and making the repairs yourself, or making it a habit of installing old incandescent lightbulbs with LED and CFL (compact fluorescent) bulbs. These are considered the “lower-hanging fruit” in the home improvement universe.
Even if bigger improvements like rainwater reclamation or a “clean” heat pump are on the horizon, credits and deductions are available to aid in minimizing the upfront costs of more substantial upgrades. It should be noted that home audits themselves are also considered to be a “covered” improvement, and can serve as the foundation for savings and a smooth-operator home.
Our team of talented and experienced tax professionals is happy to help you take advantage of any home-oriented opportunities to minimize your tax burden. A more full list of primary residence-related tax items, including the mortgage interest deduction and credit, can be found here. And, as always, don’t hesitate to reach out to our professionals with specific questions pertinent to your situation. We are here to help