Entrepreneurs, you know that cash flow is key to your business and peace of mind. Positive cash flow, that is. The same principle applies to your personal budget; every purchase you make affects your available resources.
While homeownership took a dent in the last recession, it remains the American dream for many. But becoming a homeowner comes with a great deal of responsibility. Your home can be both an asset (building equity over time) and a liability (adding greatly to your personal expense column).
The good news is you'll be eligible for new tax breaks, particularly on the mortgage interest. You can write this off on your tax return and deduct interest on up to $1 million dollars of the debt owed on your home.
You can also deduct the property taxes that you have to pay each year.
Buying a home might be the largest single purchase you'll ever make, so it's important to run the numbers before you sign any contract. If you're ready to take the leap and purchase your first home, here are 7 tips to consider before you buy:
1. Know how much you can afford. This may sound elementary, but underestimating the true costs of ownership is a common mistake. Not only will you have a mortgage, you'll need to pay property taxes, insurance premiums, and other expenses that come with owning a home. Today, a down payment is typically 20% of the purchase price. Think about how much house you will need and factor this into how much you want to put down on a home.
2. Know the score. Your credit score plays an important part in obtaining low-interest financing. Check your credit report and fix discrepancies before meeting with a lender. Your perceived debt can include your credit card limit (your allowable amount you can charge) and back taxes.
3. Avoid large purchases on credit. Accumulating new debt prior to financing a home may impact your debt-to-income ratio and how much you can borrow from a lender. In other words, don't go shopping for a car or other big-ticket item on credit if you plan to buy a home in the near future.
4. Research financing options. Save time and money by shopping around--there are dozens of websites that can help you do this-- to see which lenders are offering the best interest rates in your area. Just like buying any product, comparison-shopping will save you money in the long run--and in a 30-year mortgage the long run is pretty long.
5. Set money aside for emergencies. Many a dream home has turned into a money pit, costing more than budgeted. What if your street floods or your plumbing needs an overhaul? Before the purchase, hire a reputable home inspector, and prepare for the unexpected with money set aside for the unknown.
6. Think green for Energy Tax Credits. Opt for qualifying energy-efficient equipment in your home. Thirty-percent of the cost of solar and geothermal installations can be claimed on your taxes, which can amount to a nice savings.
7. Other renovations may help. While you usually can't deduct home improvements on your yearly tax return, the good news is that these costs can help when you sell your home. You can include them in your home's adjusted cost basis. The bigger the basis, the lower your capital gain. To qualify as a deduction, the home improvement must add materially to the value of your home, prolong your home's useful life significantly or adapt your home to new uses.
In calculating capital gains, you can also exclude up to $250,000 of the gain from the sale of your owner occupied home; $500,000 if you're filing jointly.
A home can help you build your future or, as some people discovered in the last recession, it can break your proverbial bank. Run the numbers before buying into the dream.