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Buying Your First House

Your Roof, Your Rules
Many often dream about having it all. A beautiful family, great job, nice car and ultimately, having a home they can call their own. With home ownership comes a sense of pride and belonging, two strong factors that have motivated a majority of all households to own instead of rent. And, although owning has several benefits— like having security and knowing the money you put in is going towards a great investment – there are more things to consider.

The True Value of a Home
Several years ago, home values rose substantially in most parts of the country. With a strong economy and low mortgage rates, the demand for housing pushed up the prices people were willing to pay. These rising values have enabled many to reap large profits when they sold their homes. However, home values do not always appreciate and certain areas can be hit hard when a slow down in demand occurs. We are now seeing homes drop in value, and in some cases, drop substantially.

Calculate How Much You Will Need
Buying and owning a home is expensive. You will need funds for a down payment (perhaps 20% of the purchase price) and any mortgage closing costs before you buy. After you buy, you will have monthly mortgage payments, property taxes and insurance. Then, there are the other expenses like utilities and maintenance. And, if you are like most homeowners, you will probably want to furnish and decorate it – items that can be very costly.

Deciding how much to spend for a home can be complex. You probably want as nice of a home as possible, but you want to be able to afford it. What you can afford depends on the size of your mortgage, mortgage rates, costs of home ownership, your other expenses and your income. One rule of thumb to consider is that the total of your mortgage payment, property taxes and insurance should be no more than 28% of your household income.

Here is a worksheet and a table of mortgage payments to help with the calculation.

Sample Monthly Mortgage Payments for a 30 Year Fixed Mortgage

Interest Rate Mortgage Amounts
$100,000 $150,000 $200,000 $250,000
5.0% $536.82 $805.23 $1,073.64 $1,342.05
5.5% $567.79 $851.68 $1,135.58 $1,419.47
6.0% $599.55 $899.33 $1,199.10 $1,498.88
6.5% $632.07 $948.10 $1,264.14 $1,580.17

Many financial websites include mortgage calculators to provide more precise payment levels and you can also calculate mortgage payments for other lengths of mortgages.

Worksheet

Sample Sample
Mortgage amount $100,000 $150,000 $ $
Monthly payment x 12 ($599.55x12)
$7,195
($899.33x12)
$10,792
Property taxes $2,625 $2,625
Insurance $1,200 $1,200
Total $11,020 $14,617

Household income $50,000 $50,000
Times 28% x.28 x.28 x.28 x.28
What you can afford $14,000 $14,000
Difference +$2980
Affordable
-$617
Stretching affordability
+ or – + or –

The sample is based on buying a $175,000 house with a 6% 30-year mortgage. As the chart shows, this person can probably comfortably afford buying the home with a much larger down payment. As a practical matter, the person could probably be comfortable with a mortgage in the $125,000 to $130,000 range.

Get the Home Advantage
Many taxpayers find that the interest on their mortgage and the annual property taxes they pay are large enough to enable them to itemize their deductions instead of using what is commonly referred to as the standard deduction. The standard deduction for single filers and joint filers changes every year – you may want to check the IRS website for more information. For many homeowners, their interest and property taxes exceed those amounts. Be sure to keep track of when you pay your property taxes. Some taxing districts have due dates close to the end of the year and you must have paid the tax before December 31st to get the deduction.

The IRS also allows you to exclude any gain on selling your house up to $500,000 if you file a joint income tax return and meet certain requirements. You may want to investigate these tax advantages further or talk to a tax accountant to completely understand the tax advantages.

The Power of Equity
As you make mortgage payments, you build up equity in your home. Every mortgage payment you make includes interest and principal repayment. Over time, the principal repayment reduces the remaining amount you owe. In the first few years, most of your payments will be interest.

It is in later years that your equity build-up really takes hold and you can start using it as a source of collateral for other borrowing. With a home equity loan, you essentially are pledging the equity in your home for additional borrowing. Home equity loans can be a low cost way of consolidating any other debts you have, perhaps at a lower interest rate, and you can probably get some income tax benefits along the way.

If You Decide to Sell
The housing market in many areas of the country is currently suffering. While that may be bad news for existing owners, it can be very good news for those buying their first home. When the housing market improves, and the odds are good that it ultimately will, the value of your home may rise and you can profit in a leveraged way. Let us assume you buy a home for $150,000 with a $25,000 down payment and then sell the home for $175,000 (after all costs). Your cash proceeds would be $50,000, or a doubling of your actual cash investment. In other words, the home appreciated about 17% and you made 100% on your money – just remember that leverage works in reverse if prices fall.

Here are a few Bank of Hawaii products you may be interested in:
First Time Home Buyer’s Program
Mortgage
Fixed Rate Mortgage

If you’re a first time homebuyer in Hawaii, feel free to attend one of our Bank of Hawaii mortgage seminars, where you can find out more information applying for a fixed rate mortgage, financing, adjustable rate mortgage and more.