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how you livin'?
home ownership hits record highs in the u.s.
by jeffrey d. walker

The excitement of buying your first home is difficult to put into words. I never imagined that "working on the house" would be something I'd look forward to. It first hit me as I was installing some shelves into my wardrobe closet. Driving an anchor in the wall, I remember feeling a surge of immense power washing over me.

"It's all mine!*" I thought to myself.

There was also some maniacal laughter when I said it in my head, but that might just be me. Still, I've realized that the only people who seem to understand what I'm talking about are already homeowners themselves. It's harder for those who have never owned to grasp. Therefore, I write this piece in an attempt to let others know a few of the subtle joys that come with your first home.

As you may already know, buying a house costs a LOT of money. Most of us must ask ourselves: Can I afford a house?

Upon hearing that I was thinking about buying a house, a judge I routinely appear before said: "You know when the best time to buy a house is? Anytime you can afford it."

Less than a year ago, I would have figured the day I could afford a house was very far off. But it turns out, a person who can hold down steady employment in the same field for a couple of years or so and manage to pay their rent on time while doing it may be able to own a comparable place of their own.

First, you'll first have to consider if you have any funds for a down payment. In the past, this meant coughing up around 20% of a home's value up front. But these days, those of us who don’t have five-figures in liquid assets can be pleased to know that several loan programs can get you into a home for 5% down (or less). And if scraping together a few thousand is still a bit steep, many programs allow a large portion of the down payment come in the form of a gift.

[Hmm… Maybe there's an aunt you should be nicer to…]

The programs that enable these low-down payment options vary. Check with your local bank or mortgage representative to discuss what options are available to you.

Also, don't think that lots of debt means you'll automatically be turned down for a home loan. Between the two of us, my girlfriend and I have student loans that almost equal the value of our new place. But when we applied for our loan pre-qualification, I almost choked when they told us we technically were pre-approved to purchase a home costing $35,000 more than the one we wanted. On top of that, the estimated payment for our monthly mortgage was lower than what we had been paying in rent.

Moreover, the money you spend on your own rent is typically money that you're just spending outright. There are tax advantages associated with paying a mortgage over renting. Any interest you pay against the money you borrowed is typically 100% tax deductible.

While a tax deduction is always a good thing, it's even more interesting to know that the earliest payments made in a mortgage are almost entirely interest payments. Therefore, if you've taken out a mortgage of $100,000 at an interest rate 7.5% annually, your first year of payment would equal about $8000.00. Of that amount, approximately $7000 would have gone toward interest. Therefore, about $7000 is tax deductible.

Interest rates now, however, are closer to 4%, making now one of the best times in history to get a mortgage loan.

Also, property taxes are usually 100% deductible on your income tax, too. Hey – it's more than you're getting back from your landlord. But saving on taxes is not the only reason to buy. Owning your own home is great! There have been many articles on the subject of the satisfaction associated with home ownership, so don't just take my word for it.

There are many choices one must consider, of course. If you’re thinking about changing jobs or moving in the next couple of years, then maybe ownership isn’t for you. But if you’re not going anywhere for a while, you might do yourself the favor of looking into what is available to purchase in your city for the same (or maybe less) than what you're paying in rent. "Working around the house this weekend" may never sound more exciting.

thanks to http://www-real-estate.com/resources/mortgage-tax-benefits.shtml

visit : http://www.hud.gov/ for assistance.

* Well, half anyway – my girlfriend owns the other half. But considering that this was all taking place in my head, and that she wasn't with me there hanging shelves, "ours" seemed inappropriate.


A practicing attorney and semi-professional musician, Walker writes for his own amusement, for the sake of opinion, to garner a couple of laughs, and to perhaps provoke a question or two, but otherwise, he doesn't think it'll amount to much.

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russ carr
2.23.04 @ 1:11a

I'm on my third house in just over six years. Through the creative (but entirely legal!) accounting of my wife and my loan officer, I've made money on each of the sales, and even rolled in the purchase of my car in a home equity loan which got paid off with the sale of our second house, saving us oodles in interest payments on the car.

But beware, because for as much as a home can be a gold mine, it can also be a money pit. Our sewer line cracked and flooded last winter, and we had to have half our basement excavated, new pipe laid, new floor poured, and carpet replaced. That was a nice chunk of change.

But still, given the choice, I will never rent again.

matt morin
2.23.04 @ 1:36a

There's a few other rent vs own things to remember.

Don't forget utilities. When your apartment pays for water, garbage and cable, and heating the 900 square foot place costs you $30/month, it's a lot different from having to pay for every single utility yourself plus all the gas/electric bills for heating an entire house.

Also, all repairs are yours. Roof leaking? Can't call the landlord. You are the landlord. Water heater dies? Well, until you have the cash to replace it, you're taking cold showers.

Homeowners also have to have insurance. Renter's insurance is nice to have and waaaay cheaper, but it's not required.

Don't forget the lawn/yard work.

And while property taxes are tax deductible, you still have to come up with the cash at the end of every year.

That said, I'd love to own an apartment in SF. But even if I only put 10% down, that's a minimum of $60,000 I'd have to have just for the downpayment. That doesn't cover closing costs or money to fix up the place once I bought it.

jeffrey walker
2.23.04 @ 9:38a

Matt's right in some ways. Renter's insurance is cheaper, but it only covers your stuff. Homeowner's insurance covers many items of damage to your home as well as your stuff inside - therefore, when your roof gets hit by a limb in a storm, you’re covered all the same. Also, homeowners insurance is paid by the bank as part of your mortgage payment (as well as your taxes). Renter's insurance is an additional payment that must be paid later.

And to assume that just because your renting and not directly paying the property insurance or taxes, don't think you aren't paying them -- the landlord will get his costs back from YOU, the tenant. And that includes repair costs. If you rent a newly renovated place, you'll be paying as if you just renovated your own place.

adam kraemer
2.23.04 @ 12:01p

Either way, congratulations, Jeff. When's the housewarming party?

jeffrey walker
2.23.04 @ 12:05p

We're shooting for spring, once the downstairs is painted and decorated. Besides, no one wants to travel around the City in the cold. I'll send you word...

juli mccarthy
2.23.04 @ 5:21p

My mother always said, "You don't own a house, a house owns YOU." The upkeep of actual property has always been too much like work for her liking, and she'd much rather not be tied down to a place. I, on the other hand, am a big supporter of home ownership, and I very fortunately married a guy who feels the same way. I wanted to point out one thing, Jeff - you're right when you say that most of your mortgage payment is interest for awhile, and you're not paying down the principal, but I think you NEED to pay down the principal as quickly as you can. You can do this by making extra payments or by increasing the amount of your payments, but be warned: many lenders will pretend they don't know what you're doing, and will NOT apply the payment to the principal unless you specifically arrange it with them ahead of time. We almost learned this the hard way - my husband had gotten a very generous bonus and decided to pay down the mortgage, so he looked into it and discovered that any extra monies would still be applied to the interest. We ended up paying an additional $700 to re-write the terms so that the money would go where we wanted it to. I know that sounds like a lot of money, but doing so saved us well over $15K in the long run.

robert melos
2.23.04 @ 5:56p

As a Realtor, I am always for ownership. It's all yours to do with as you please within the letter of the zoning laws, etc.. I've never actually rented, so I can't even say which is better, but financially speaking, anytime you can own your home you're in a better position.

Congrats. Enjoy the feeling of ownership.

kevin roger
2.24.04 @ 6:01a

Nice article. In the UK, sadly, tax deductions for mortgages went the way of the dinosaurs some years ago.

On the other hand, 100% mortgages are not uncommon - but there is usually a premium if you borrow all the money to buy your home from the bank, and don't put anything down by way of deposit. Also, it is no longer necessary here to take insurance from your mortgage provider.

"Mortgage" means, roughly, "dead loan". At the end of the day, until you pay off the loan, the real owner is of course the bank.

In much of Europe, homeowning is quite rare. There are many reasons for this, including different social conditions and the existence (or otherwise) of a developed lending market.

dan gonzalez
2.24.04 @ 11:50a

Here it is a good idea to own in a reasonably priced market. The entry barrier is the down payment, but that is also equity and if property values appreciate, you'll have a decent return on that investment. And although you don't get the title until the loan is paid off, and you're paying a boatload of interest, you're still chipping away at the principal and building equity, which is more than you get for your rent money.

And if you happen to be married and have a comparable income to your spouse, you almost have to have a mortgage. You need the tax break, it's the only significant one you can get.


jeffrey walker
2.24.04 @ 2:50p

Kevin; what's the average mortgage term over there? I seem to recall speaking to someone in Switzerland once who told me that mortgage terms run for like 100 years, and that car loans are also something like 20 years. Is this true?

sandra thompson
2.24.04 @ 5:29p

A home is an asset. Rent is a liability. You do the math.

(I know that's way oversimplified, but I'm feeling humourous today.)

(Since I have a broken humerus, I think that's allowed.)

(It may be the pain pills.)

tracey kelley
2.25.04 @ 1:10a

When making extra on your monthly mortgage payments, you can also designate the extra straight to the principal. It doesn't seem like it makes much of a difference, but combined with building equity, a full extra payment a year (or more) has a wonderful effect.

Aceepting PMI in lieu of a full 10%-20% can also help the 1st time homebuyer, but you need to be careful, as you can end up paying for that for up to 10 years. We had to have PMI on our 1st house, but because we paid extra on the principal ($100-$200 more per payment) the 1st 3 years, when we decided to refinance when the interest rates went down, the extra principal payment took that PMI right off.

I'm glad we own a home, for a variety of reasons, but sometimes, when I'm doing yardwork, I beg for my "pick up and go" freedom. I also don't like seeing my travel budget eaten away by something like storm windows or chimney cleaning. But it's nice to have a part of the world that's mine.

However, I'm itching for something different. That's also a bad thing when you own, because it's hard to justify a full house move/selling/rebuying unless you're relocating or starting a family and need more space. Right now, I want to build, and I need to get over that fast.

juli mccarthy
2.25.04 @ 2:00a

When making extra on your monthly mortgage payments, you can also designate the extra straight to the principal. Check with your lender! This is NOT always automatic, and some lenders will let you think that it is. I'm not doubting your experience, Tracey, but it's the opposite of ours. And John does this for a living, so he's seen it many times.

trey askew
2.25.04 @ 8:36a

I'm right there with ya Jeff. I do love having my own place. It's nice to see something you don't like and be able to fix it.

adam bration
3.9.04 @ 7:18p

Well, someone has to put a word in for renting.
Because real estate prices are not in fact guaranteed to rise, and because lots of recent buyers of real estate have little or no equity, a downturn in prices will wipe out all the home equity of folks who were financed with just 5-10% down. Then, if said homeowners decide to stop paying for over-priced real estate and allow foreclosure, prices are further depressed. Lenders stop making further home loans and you get a contraction in the real estate market. So, if you think that a price drop is a significant risk or likelihood it's wise to rent, because renting shifts the risk of a real estate price drop onto the landlord.

When the home prices do drop and there's a distressed real esate market, renters can ask for lower rent and they still have their future-downpayment savings, their ability to sleep at night, and their ability to move without incurring major transaction costs or price risks. I should note also that rents have dropped in parts of the San Francisco Bay Area market by almost twenty percent in the last couple of years, so the risk of ownership has significantly increased -- I just can't quite figure out why general prices of homes comparable to the rental stock haven't dropped also. Maybe the banks are being silly with loans.

Both residential prices and rents plummeted in the late 1980s in California and in parts of Manhattan. It can happen, especially when banks are crooked or stupid, as the S&L debacle clearly showed they could be in staggering numbers. [The hit the US taxpayer took was at least 120 Billion -- BILLION -- dollars. How many $ 200,000 homes have to turn into $80,000 homes to make up a 120 Billion dollars of losses? Answer: 1 million.]


mike julianelle
5.13.04 @ 2:36p

I don't understand this column. Please explain it to me, Jeff.

matt morin
5.25.04 @ 4:01p


Saw this today and thought of this column: California's median price rose 24.6 percent in April to $453,590 for an existing, single-family home, from $364,040 a year ago.

That's for all of CA. And it's a median, not an average.

Yeah, sure. I'm buying a home anytime soon.

jeffrey walker
5.25.04 @ 4:08p

what's the rent gone up in the same time? It's rare the real estate goes up and all rent stays flat. But you can keep paying someone else to pay their own mortgage instead of doing something for yourself if you like.

matt morin
5.25.04 @ 4:12p

Rents in the city have pretty much stabilized after dropping for the past year. I don't know what they're like outside SF though.

I could afford the payment on a $450k house, but I don't actually have $50,000 or so just laying around for the downpayment. That's the main problem.

jeffrey walker
5.25.04 @ 4:29p

get a better deal; I paid just at 5%. You'd be down to a $22,500 downpay, most or all of which can be a gift.

Stable rent -- after a year? That's not all that stable. Unless your rent is controlled, it never all that stable. The only stable payment for shelter is a fixed mortgage or a controlled rent environment. Otherwise, you're living year to year in fear.


lisa r
5.25.04 @ 4:53p

My rent has gone up every year I've been here. The latest jump was $40...to cover increased maintenance costs. Excuse me? The Presidents' Day storm was LAST year. Much less snow removal this year, and I sure haven't had anything repaired in my place.

I'd love to be in a position to own a home. No elephants masquerading as a couple and their dog overhead. No one pounding up the outside stairs at 3 in the morning waking up my guests in the guest bedroom. Walls that aren't required to stay white. My own, more efficient, washer and dryer (which are currently taking up space in my walkin closet). More storage. The ability to have a grill. You'd think since I live on the second floor and am barred by fire code from having a grill I'd pay less than the people downstairs. Riiiiight.

matt morin
5.25.04 @ 5:09p

SF is almost all rent controlled. For continuously occupied units, owners can only raise rent 2.2% per year. (They could raise rent to anything that wanted if someone moved out.)

So for years rent went up 2.2% each year. In 2002 it finally stopped going up. In 2003 it actually started coming down - owners couldn't rent places for as much as they could during the dot.com heyday. Now in 2004, they've leveled out again.

But right now I'm paying $1560/month for my apartment. If I owned an identical condo, I'd be paying three times that much, plus $300-$400 in condo fees each month, plus water/garbage/gas - which I don't pay for now.

robert melos
5.25.04 @ 10:22p

Whoa! I guess NJ prices aren't that bad when you consider the average central NJ rent for a two bedroom condo is $1200 to $1400 in New Brunswick/Rutgers area. If you are in the definite college area a two bedroom can run as much as $1650, but figure 4 students dividing that isn't bad. That doesn't include anything in the rent.

I'm living much better than I thought, after reading those rents.

jeffrey walker
5.25.04 @ 11:17p

Oh yeah - you're talking about San Fran; the only U.S. City worse in overly inflated real estate value than Manhattan.

Matt, and I'm sure I'm telling you something you know, although you're saving in rent, you're paying an extremely inflated rate anyway. Sure, you can't afford to buy there because you aren't trump or puff daddy. But, as I said, rent controlled places don't apply to the real world. In most places, rents charged are proportional to the land value.

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