If you’re a Millennial, like me, then chances are that you and your friends are starting to think seriously about home ownership.
Is it worth it? Have I saved enough? Is it too great a risk? Is it really better than renting? These are all fine questions – questions that MoneyQlip has helped provide answers for in some of our past post. But one aspect of home ownership that is often overlooked by first time buyers is the part government plays in homeowner’s lives; and it’s a lot more than little, so pay attention.
In ways large and small, the federal, state and local government play critical roles in the housing market. Knowing some of the major policies that affect homeowners will help you make a more informed decision on your future living situation – and as anyone who has bought a home in the past can attest, it pays to do your homework. This article will take a light look at some of the major areas of government policy that could affect your wallet. So let’s dive in.
Mortgage interest deductions
The federal government, as well state governments who impose income taxes, are hugely supportive of homeownership. It’s good for the economy, good for the state, and homes are the single largest asset that most people will ever own. In the interest of incentivizing homeownership, the federal government provides generous tax benefits for homeowners.
The 800-pound-gorilla of tax deductions is the mortgage interest deduction. In fact, this incentive cost the federal government upwards of $68 billion a year. It also happens to be one of the primary tax variables that should be accounted for when considering whether to rent or buy.
In a nutshell, the mortgage interest deduction allows homeowners who are paying interest on their mortgage – which includes everyone who is financing the purchase – to deduct their annual interest payment contribution from their taxable income. To take advantage of the incentive, homeowners must itemize their deductions. It also pays to consider two critical realities: not every homeowner receives the deduction (because they don’t itemize), and it’s not worth it for everyone (depending on how much interest you pay per year).
Keep in mind, itemizing your deductions will mean that you give up the standard deduction and will have to put significantly more work into filing your taxes. So before you make any decisions based on this policy, do your homework. Bankrate has an excellent tool to help you calculate your potential savings, check it out here.
While the federal government plays an important role in the national housing market, most of the real action in overseeing the sector is undertaken on the State and local level. And the biggest local government consideration, one that’s often overlooked, is property taxes.
Want to live in the dense urban center of your city instead of the unincorporated sprawling suburbia? You might want to think again.
Property taxes vary widely from jurisdiction to jurisdiction, and if you are considering living in a part of your county that has incorporated into its own jurisdiction (township, city, village, etc.) then take a good hard look at the proprietary tax rate first, as well as the relative property values in nearby unincorporated areas.
For example, property taxes in unincorporated Miami-Dade County currently average 1.79%, while in Miami Gardens, the average rate is 2.41%. It might sound like a small difference, but since the rate is calculated based on the value of your proprietary, it can mean hundreds of dollars more per month.
One sliver of good news, brought to you by Uncle Sam, is that property taxes are also tax deductible if you itemize. Savvy buyers should consider both the property taxes and the mortgage interest deduction when deciding whether to itemize and whether buying is preferable to renting.
Mandates & Regulations
So much of the appeal of homeownership comes down to the idea of having the freedom to do with your property what you wish. In reality, though, it’s not quite that simple. Counties and municipalities often have their own building codes, zoning plans and property restrictions that aspiring residents should keep in mind before purchasing a home.
Some of these rules can be valuable and common sense (higher wind resistance standards for roofs in hurricane prone localities). But some are overbearing and dubious (restrictions on what color you can paint your home, permit requirements for simple non-structural additions). Familiarizing yourself with some of the basic rules governing the city or county that you are interested in moving to can save you a lot of heartbreak in the long run and potentially save you a lot of money down the road.
Beyond the regulations, it’s also important to keep costly mandates in mind. Living near the water might be a desirable option, but living in coastal flood zones will almost certainly require you to purchase flood insurance – an additional substantial monthly cost that you should account for prior to signing any purchasing agreement.
Most aspiring homeowners know that the key to getting great lending terms is rock solid credit. And that’s very much the case. But far fewer consider or appreciate the gravity of Federal Reserve policy in setting lending interest rates. It’s worth understanding, because knowing the role that federal monetary policy plays in the market will help you know whether now is a relatively good time to buy or refinance.
Think of the Federal Reserve as the bank for banks. Lenders regularly borrow money from the Federal Reserve to get a short term influx of cash for a relatively low interest rate. And while the Federal Reserve doesn’t directly set the mortgage interest rates, they do have complete control over the interest rates that banks must pay to borrow money. This is referred to as the Federal Funds Rate, or Fed Rate for short.
The Federal Funds Rate has a direct effect on mortgage interest rates. When Federal Funds Rates increase, this increases the cost for banks who need to borrow money. They pass along this increased cost in the form of higher mortgage interest rates. In times of economic sluggishness or in the event of a recession, the Federal Reserve usually lowers the Funds Rate to stimulate more lending by expanding the supply of money available to lenders and lowering the cost to borrow that money.
Understanding where the Federal Fund Rate is currently set and anticipating where it might move can help you get the best deal when the time comes to making a buying decision. If current Fed Funds Rates are high, it might be worth it to rent until rates are lowered and vice versa. With rates now near historic lows, now might be one of the best time in decades to consider buying over renting.