Katie O’Connor doesn’t want to say that her mother was crazy when she suggested that the recent college graduate start looking for her first home. Unrealistic? You bet.
“I’m only 23 years old and was thinking that renting an apartment was as good as I could do,” she said.
Now, with help from her parents and Uncle Sam, she’s the proud co-owner (with mom and dad) of a $410,000 condominium in Sherman Oaks, a suburb of Los Angeles where the median condo sale price is $325,000, according to DataQuick Information Systems. Few 23-year-olds could boast of owning a pricey two-bedroom, two-bath condo in a complex with a swimming pool, Jacuzzi and gym just off Ventura Boulevard (the Valley equivalent of living just off Park Avenue). But Katie’s mom, Los Angeles psychologist Jane Lewis, did the research, ran the numbers, and determined that the time to buy was now.
Katie, who works as a production assistant at an entertainment company, says that if she hadn’t taken her mom seriously enough to start looking, she would have regretted it for the rest of her life. “Why not take advantage of this horrible economy if you can?” she asks. “The worst thing that can happen is that you’ll realize you’re not financially stable enough to buy something. But maybe you are. I think people should really look into it.”
Katie’s mom knows that home ownership is often the first step toward building real wealth, and wanted to help her daughter get started early. “It’s so costly to live in this state,” said Lewis. “If you have a child who needs to live in California, and you can afford to jump start them, I think it’s a great idea.”
Owning your own home early in life is valuable — but not because homes are appreciating at the torrid pace of the 1990s and early 2000s. In normal times, residential real estate prices tend to appreciate only slightly faster than the rate of inflation. And in recent times, prices have plummeted.
Your home is both a place to live, and a type of forced savings plan. You either make the mortgage payment or lose the roof over your head. Through the simple discipline of paying the mortgage every month, you can build equity and get into the positive habit of paying yourself first. After all a dollar used to pay down your mortgage increases you net worth, while a dollar paid to your landlord reduces it.
Buying a home is good for the economy, too. Homeowners make stable citizens who pay taxes and vote. They fuel the economy by buying durable goods, such as refrigerators and sofas. And at a time when a revival in the housing market is key to consumer confidence, a stronger financial system and the economic recovery, buying a house can be a win for consumers as well as the country.
There has never been a better time for young people like Katie to buy a starter home. The lingering housing and credit crisis has reduced prices, which may get even cheaper. And to spur lending, the Federal Reserve has kept interest rates low, which means low mortgage rates. Even better, legislators have moved to help first-time homeowners like Katie with a temporary tax credit of up to $8,000 (see box below on the first-time homebuyer’s credit).
This all translates into affordability.
The median-priced home nationwide now costs about $178,000, according to the National Association of Realtors. That’s down from some $219,000 a couple of years ago. Starter homes are even cheaper, the Realtors’ group estimates — about $151,200. Assuming a 10 percent down payment of $15,120, the 30-year mortgage loan would be $136,080. At 5.55 percent (including a mortgage insurance premium, which is required for those with down payments of less than 20 percent of the home’s value), the monthly payment would be $776.92.
Caveat emptor: The cost of a home doesn’t stop with the mortgage. There are property taxes, insurance, utilities, trash collection and repairs to pay for, too.
Property taxes are public record in most communities, and insurance agents can provide quotes for fire and other insurance. Utility bills will vary based on the home’s location, size and insulation. Sellers are often willing to share a few months of bill history — both winter and summer. For condos or co-ops, homeowner’s dues or common charges add to the total.
Uncle Sam Wants to Help You Buy Your First Home
But you’ve got to act quickly to snag the $8,000 tax credit
Uncle Sam is willing to put $8,000 cash in your pocket if you buy a first home — but you’ve got to sign a binding contract by April 30 and close the deal within 60 days. If you’re interested, don’t delay.
Why would the government do such a thing? Housing is considered key to economic recovery because buying a home triggers a whole host of related expenditures, including furniture and appliances. And consumer spending accounts for about two-thirds of economic growth.
So when policymakers were desperately looking for ways to revive the moribund economy, they landed on giving individuals incentives to buy new houses. The first-time homebuyer credit was born.
What is it, who can claim it, and how?
The first-time homebuyer tax credit can reduce your federal income tax bill by up to $8,000, or 10 percent of the price of the home, whichever is less. Technically, that $8,000 can be claimed in the year before you buy the home. Those who close before April 15, 2010 can claim it on their 2009 returns and get the refund a year earlier.
To qualify for the $8,000 break, buyers must be at least 18 years old and can’t have owned another home for at least three years. The credit also phases out for those earning more than $125,000 when single and $225,000 if married. Singles can claim a partial credit until their income exceeds $145,000 and married couples get partial credits until they earn more than $245,000. You also can’t claim the credit for a home selling for $800,000 or more.
If you meet the IRS deadlines to claim the credit, congratulations! But to claim it, you will need to include with your tax return a copy of your HUD closing statement (ask your realtor). That document spells out all the pertinent details of the deal, including the cost of the home and the financing.
For more information and tax forms, go to the IRS website.