Home Ownership for Military Families – 5 Tips
Purchasing a home is a weighty decision for everyone, but for Military families, there are many factors to consider before jumping into the home owner’s pool. Military families live a lifestyle unique from many in the economy. Moving from Fort Bragg, to Washington DC and then on to Fort Leavenworth could make even the most even keeled real estate professional’s head spin. Not only are military “frequent movers”, but there are often deployments or TDYs that increase the need to analyze if purchasing a home is right for your military family.
To make the Rent v. Buy decision easier, it is best to evaluate your circumstances in these five different areas. Organize your thoughts, be as objective as possible and make the right decision for your military family.
Financial Preparedness
Are you ready to buy a home financially? The evaluation of your credit and your financial history by lenders will actually be a report card that determines your eligibility and loan interest rate. Additionally, your ability to supply a down payment can also affect the interest rate and the type of mortgage you can receive.
If you do not have money for a down payment, a VA Loan may be your best option. If you do not have money for a down payment, and cannot consider a VA Loan, you will be required to pay mortgage insurance as part of your monthly mortgage payment. This insurance can run between .5 and .7% of the total loan principle.
If your credit history is not so healthy, or if you do not have savings, your lender may not offer you the best interest rate available. Higher risk borrowers are required to pay higher interest rates to offset the risk of their loan.
Closing costs and earnest money are another cost to consider. Closing costs that you must have cash for at settlement can range from a few hundred to thousands of dollars, dependant on the loan type. Sometimes these fees can be built into the loan, dependent upon the appraisal; otherwise you will be required to pay for the negotiated costs at closing. Additionally, offers to buy require earnest money, usually ranging from $500 to 1% of the price.
Expected Time at a Current Duty Station
In the current real estate climate it is very important to consider the length of time that you expect to reside in the home before you make a purchase. Markets that were once assured to appreciate may now be either stagnant or on the decline. Once you have outlaid savings for closing costs or a down payment, a short term home ownership may not redeem those debits to your precious savings.
Evaluate the expected costs of purchasing and subsequently selling your home, divide that by the number of months you expect to live there, and then add that to your monthly mortgage payment and other home expenses. This will yield your actual cost of short-term ownership by which to compare area rentals to. Keep in mind that this evaluation only works in an ideal market where you can sell or rent your home immediately after you put it on the market.
Tax Benefits vs. Actual Costs
Yes, the mortgage deduction on your income taxes is significant! But, does it overcome the money that you will outlay on closing costs, repairs, upgrades and home owner association fees for just a few years of ownership?
One cost is “mortgage interest” – the money you pay for the use of someone else’s money, when you borrow funds to buy a house. Although mortgage interest is a large part of your housing payment, you can deduct this interest from your taxable income on your federal income tax return and (in some states) on your state income tax return. This can save you a fairly substantial amount of income tax. In addition, you will pay property taxes on a home that you own. Those property taxes are also deductible from taxable income on your federal income tax return and some state income tax returns, and thus offer you additional income tax savings.
This tax benefit effectively decreases your monthly home expenses (which include mortgage payment, real estate taxes, homeowner’s insurance, and any association fees) and should be taken into account to determine the true cost of home ownership. Keep in mind that if you are renting, you are probably covering the costs of someone else’s ownership, but not receiving any of the tax benefits.
Market Climate if you PCS
If you are not planning on retiring from Military life soon, you are probably looking at a move sometime in the next three years. If you have your financial house in order to buy, this may be the most important part of your decision about purchasing a home.
When the PCS orders arrive, you have two choices. Sell? Or Rent the home you have purchased?
Pros of selling include: possible equity in the home that can be rolled into your new home purchase, capital gain from the sale will be virtually tax free if you put it toward another home purchase and the simplicity of owning only one home at a time. But also consider the cons of selling: you may be selling at a bad time for the market and have to cover your mortgage while the house sits empty to sell and loss of potential appreciation if you could hold the investment for a few years.
Pros of renting Include: the property could appreciate and the tax benefits to owning an investment property that could offset some of the costs. Cons of renting the property: damages from renters, unreliable income from renters, possibility of paying taxes on the profit if you sell and do not fall into military protection clauses for sales after PCS. For specific guidelines regarding this benefit see the IRS publication for Military Tax Benefits
Personal Considerations
You have to know yourself and what you are willing to do or do without.
Owning a home means that you fix, or pay for someone to fix that broken toilet or fence. If an appliance goes up, there won’t be a landlord to call. Consider if your monthly income is prepared for a repair hit once in awhile, or if you really LOVE working on your home. Upkeep on yards, exterior and normal maintenance should be things you factor into your budget when making your decision to buy.
To cover some of these additional costs, you may have to give up some things you are used to having in your budget. The expression “house poor” sums up the circumstances when buyers have devoted so much of their income to home ownership that they are too “poor” to do or have things that like.
Finally, do you have the stomach for home ownership? Would the possibility of being an absentee landlord fray your nerves? Does watching the housing market make you feel like you are riding a roller coaster? These are all questions that you need to ask yourself as you make the decision to rent or buy