I believe you need to live there for 30 days and you are free to do what you want. Like I said before, make sure you SHOW your intentions to live there by switching your DL, and your mail.
Wheres My Money,
You only have $500 in this deal right now. You say that the cost of homeownership is not really affordable for you right now. You say that the housing market is too soft to flip the property. I am guessing that the market rent for this property will not cover your overhead.
I suggest you just walk. Ask the builder to release you from the deal and refund your money. If he won’t, then you have only paid $500 for a lesson in personal financing. Much cheaper than buying the property then losing it to foreclosure in a couple of years.
If I were in your place, I would continue to rent that $700 apartment and use my discretionary income to purchase cash flowing rental property.
Dave T,
After carefully taking into account the tax benefits the house would introduce. I would only have to come out of pocket $222 more. That’s if I don’t escrow the taxes and insurance. I should be able to cover everything and get my businesses off the ground.
Besides, my apartment complex is going to upgrade my apartment before the lease is out. so, there would be that construction disruption in my REI business and of course the rent would be raised.
So, the reason why I hesitated before to get a house was I didn’t do a detail look at my situation. And I didn’t determine what I could afford
Thanks
Most lenders are only doing the conforming loans that can be sold to Fannie Mae or Freddie Mac and these loans will require an escrow account.
Whether you escrow or not, you still have to pay property taxes and hazard insurance out of pocket. There may be lenders who will not require an escrow account, but they will probably charge a higher interest rate and/or higher loan fees. By not having an escrow account, you are just replacing installment payments for the priviledge of paying the entire tax bill and insurance premium in full in a lump sum each year. Don’t ignore the cost of property taxes and hazard insurance in your annual budget just because you are not planning to escrow taxes and insurance.
I also caution you about putting too much emphasis on the tax benefit. If you are in the 25% tax bracket, then you have to spend $1 for every 25 cents you save on your tax bill. Furthermore, you only realize a “tax benefit” if you itemize your deductions. The only deductions you get due to home ownership are home mortgage interest and real property taxes. For the 2006 tax return, it is to your advantage to itemize your deductions whenever your allowed deductions exceed $5150 per taxpayer. If you are married filing jointly or a qualifying widow(er), then your itemized deductions must exceed the standard deduction of $10,300 to gain a tax benefit.
If we consider an $11317 mortgage interest payment and a $1243 property tax bill as the only itemized deductions for the year, then the true tax benefit from the first year of home ownership is only $565 for a married couple in the 25% tax bracket filing jointly. In other words, the tax bill is only $565 less than it would have been if our married couple did not itemize their deductions. In this example, it cost our homeowners $12560 out of pocket to save an extra $565 on their tax bill.
Their housing cost of homeownership is really higher since maintenance and property insurance are not deductible. Let’s say that our couple in this example have to pay an additional $1500 per year out of pocket for homeowner’s insurance. maintenance, and repairs. This increases our couple’s out of pocket cost of homeownership to $14060 per year, for the same $565 tax savings. If our couple were renting an apartment for $700 per month instead, their landlord would pay for maintenance, hazard insurance, property taxes, and mortgage interest. As renters, they would give up a $565 tax benefit but save $5660 in their annual cost of housing.
I recently heard on CNBC a supposedly financially astute individual say that the tax benefit of home ownership reduces the effective interest rate on a 6.5% mortgage to 4.875% for the 25% bracket taxpayer. If you do the arithmetic for our example, that $565 tax savings has reduced the effective interest rate on a $175K 30-year fixed loan from 6.5% to just 6.177%.
My point is that the real tax benefit of home ownership may not be as much as you expect when you compare your tax liability after itemizing deductions with your tax liability after taking the standard deduction.
Great post Dave. Thank you for breaking that down. You may have just saved this person a lot of time and headaches.