A recent article in RISMedia’s Housecall (First-Time Homebuyers: Financial Missteps and Opportunities) looked at the profile of first-time real estate buyers. Single women continue to outpace single men as homebuyers, according to the National Association of homebuyers, while single men only made up 8%. The profile also shows that women continue to earn less than men in a similar position and also have more debt than men.
No matter the gender, all homebuyers need as much information as possible in order to make the best informed decisions when it comes to purchasing their first home. When asked about the important steps one must take, Steve Williams, SVP of Financial Planning for BMO Private Bank, offered the following advice.
Selecting the right mortgage is vital. For example, if the price of the new home is high, the new buyer may opt for an adjustable rate mortgage -or even an interest-only mortgage (bad choice). The ARM rate may fluctuate after the initial term. For example, a five-year ARM at 4% interest may go to 6%, thus increasing the monthly payment.
Lately, interest rates have remained quite low. If the new homebuyer is planning on living in their new home for a considerable period of time, a traditional 30-year mortgage is the best way to go. The current rate is about 4.5%, so it would be advisable to stay away from ARMs and interest-only loans.
According to Mr. Williams, the easiest way to calculate how much one can afford to pay for a new home is to consider the industry-accepted 28 percent rule. This means one should aim to have monthly housing expenses, which includes principal, interest, taxes and insurance, total less than 28 percent of gross monthly income.
There are indeed some tax breaks that are advantageous to first-time homebuyers. One of the main exceptions to withdrawing IRA funds prior to 59 ½ is for first-time home purchasers. One caveat is that taxes would still have to be paid at the current tax rate. The main tax break is that one will not need to pay a penalty. A smart move would be to compare the long-term cost of reducing retirements using those funds for the purchase of a home.
Another point to consider is the impact of the new tax bill on the homebuyer. The two main effects of the new tax law are the elimination of interest deduction for a second mortgage, such as a home equity loan, and mortgage interest deduction is capped at debt for a home purchased for $750,000.
Mr. Williams also believes it is vital that when considering a first-time home purchase by a male or female that this decision should be part of a bigger, all-encompassing financial plan. In other words, complete a financial plan and determine how the purchase of a home fits with their long term goals along with other expenses and income.