Homeownership can help build your future or break your bank. Run the numbers before buying into any dream.
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.
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7 tips for buying your first home
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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 forEnergy 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.
RELATED: Creative things to do with a spare room
Things to Do With a Spare Room
7 tips for buying your first home
Whether you're knitting, painting, working on a stamp collection or want more room to work on your favorite hobby, a craft room can be converted in a week or two for a few hundred dollars. "All it takes is a little motivation, some ingenuity and in a few weeks, you could have your dream space," says Brian LeBow, a real estate agent in Arcadia, California.
The biggest flatscreen TV you can afford, a comfortable couch and a nice stereo system can be just the beginning of a place to get comfortable and read or watch a movie.
"This is a private space for those who live in the house, where you can spend time by yourself or with a loved one," says Michelle Workman, a celebrity interior designer. "It also allows you to get the television out of the living room and turns that space into a conversation and entertaining room."
"I would get the most comfy sofa for this room, and an ottoman as a coffee table," Workman says, along with a chaise for reading, a basket for throw blankets, book shelves to create a library feel, and a TV on the wall and home stereo system.
It can be done in a weekend. Costs will vary depending on the quality of products you want, or you may have an old sofa to re-upholster or one that's not being used.
If you've collected too many books over the years and have no place to put them, a library can be a good use for a spare bedroom. It can also be used as a designated "quiet room" to meditate and relax in.
Judy Crockett, a retail management consultant in Manistee, MI, says she converted the smallest bedroom in her new home into a quiet zone painted in a warm, gold color and put a soft area rug on the floor. A small desk and home office supplies were put in a closet with the closet doors removed and curtains added. A bookcase and overstuffed chair were added.
"The real treat in this room is a small electric fireplace and mantle that we purchased at a yard sale for $30," Crockett says. "We added a scented candle and a salt lamp to give the room a spa feel."
"While I often work from home from this room, I can simply pull the curtain to close off the office desk and workspace to get my spa area back again," she says.
If you don't want to share a home office with a quiet library or spa room, turn one spare room into an office. If you have enough spare rooms, give each person their own office, as Richard W. Hayman, 69, of Rockville, MD did in his home. Hayman says they replaced carpet, painted walls, added lights, furniture and built-in for desks in just a few days at $4,000 each. Your costs can be a lot less if you already have most of the office decor.
Instead of a cramped home gym, turn a spare room into a yoga studio and save money by not going to someone else's studio. "Find a large mirror, bring in a fan, your favorite yoga mat and you're ready to go," says Ryan Hart, 28, an architectural consultant. "Want to take your home studio to the next level? Add hardwood flooring, a small TV to follow along with yoga instruction videos, and a radio."
Whether you're using a spare room to store wine or drink it, it can be a good place to set up an informal bar and entertain guests. You can add a small refrigerator and store drinks -- or a keg of beer -- and keep your beer cold without having to run to the kitchen.
A New Jersey homeowner who was a client of Denise Baron, a real estate agent in Pennsylvania and New Jersey, turned a spare bedroom into a room just for her cats to play and live in. It's a way to keep the pets from destroying other parts of the house, and is a spot to put their playthings.
If a craft or media room isn't for you, a game room with tables and comfortable chairs where you can play board games with your grandchildren or cards with friends (poker) can be an easy conversion of a spare bedroom. You may want to add some comfortable furniture for lounging, and good lighting to better view the games.