Taking the Plunge
PAGE 2
While you could use your entire savings for the down payment, I prefer that you limit it to between $20,000 and $25,000 so you'll have cash available for moving and closing costs, including the fees you'll pay the lender to cover a variety of expenses and charges. You should look at condo units that go for $250,000 or less. That way your down payment could be at least 10 percent.
If we assume you find a $250,000 unit with a $25,000 down payment, that works out to a $225,000 mortgage. At today's 5.5 percent interest rate on a 30-year loan, your monthly payment would be about $1,277 per month. But then you need to add the cost of insurance, about $50 a month. Property taxes can add about 1 percent of your mortgage cost, so let's say $225 each month for that. And we've also got that monthly condo maintenance fee; for this example we'll say it's $250.
There's one other cost you need to consider, since your down payment is less than 20 percent: private mortgage insurance (PMI), which is the lender's way of getting extra protection because you are a slightly higher risk. The PMI would run you about $100 per month until your equity in the home reaches 20 percent.
When you add all that up, you're at $1,900. Now, don't worry. I know that's a lot more than your $1,500 rent bill, but you're about to enjoy one of the nicest breaks of home ownership: the mortgage-interest tax deduction. Your income puts you in the 30 percent tax bracket, so 30 percent of the interest you pay will be deductible. In the early years of the mortgage, the vast majority of your money goes to pay the interest, not the principal. So that $1,277 mortgage payment is going to give you nearly $400 in deductions per month. Voilà: Your net monthly costs are down to $1,500. (You can find great mortgage calculators at mortgage-calc.com.)
Of course, you don't get that tax deduction back until you file your taxes the following year. If that's going to make for a tight squeeze, ask your payroll office to adjust your withholding so you have about $400 less per month siphoned off for taxes. Essentially you're giving yourself the interest-deduction money each month, rather than waiting for a refund after you file your return. Okay, new homeowner-to-be, start looking!
If we assume you find a $250,000 unit with a $25,000 down payment, that works out to a $225,000 mortgage. At today's 5.5 percent interest rate on a 30-year loan, your monthly payment would be about $1,277 per month. But then you need to add the cost of insurance, about $50 a month. Property taxes can add about 1 percent of your mortgage cost, so let's say $225 each month for that. And we've also got that monthly condo maintenance fee; for this example we'll say it's $250.
There's one other cost you need to consider, since your down payment is less than 20 percent: private mortgage insurance (PMI), which is the lender's way of getting extra protection because you are a slightly higher risk. The PMI would run you about $100 per month until your equity in the home reaches 20 percent.
When you add all that up, you're at $1,900. Now, don't worry. I know that's a lot more than your $1,500 rent bill, but you're about to enjoy one of the nicest breaks of home ownership: the mortgage-interest tax deduction. Your income puts you in the 30 percent tax bracket, so 30 percent of the interest you pay will be deductible. In the early years of the mortgage, the vast majority of your money goes to pay the interest, not the principal. So that $1,277 mortgage payment is going to give you nearly $400 in deductions per month. Voilà: Your net monthly costs are down to $1,500. (You can find great mortgage calculators at mortgage-calc.com.)
Of course, you don't get that tax deduction back until you file your taxes the following year. If that's going to make for a tight squeeze, ask your payroll office to adjust your withholding so you have about $400 less per month siphoned off for taxes. Essentially you're giving yourself the interest-deduction money each month, rather than waiting for a refund after you file your return. Okay, new homeowner-to-be, start looking!
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