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Don’t Buy a House Just for the $8,000 Tax Credit!

Don’t Buy a House Just for the $8,000 Tax Credit! post image kitchen

Everyone has an Opinion on Buying a House

I have been a home owner for less than a week and I’m already mad. While we were looking at places to buy we were given much advice, some good, some benign, and some just plain bad. The bad advice was from people who weren’t home owners repeating things they’ve heard about buying like the amount of rent that you pay is the mortgage amount  you should aim for.

That’s simply not true. Besides your mortgage, there are several other expenses that you have to adjust your budget for that some people ignore.

  • Homeowner’s Insurance
  • Private mortgage insurance
  • Home Association Fees
  • Property Tax
  • Maintenance & Improvement

If you’re looking at the above expenses and you’re a bit hesitant, then continue renting and build your down payment. Don’t buy a house and think that you can make it work somehow. Have a specific financial game plan to be successful with your personal goals. Remember, though, that buying a house is not the end all. Don’t sacrifice other goals for this piece of property.

Buying a house is the biggest purchase most people make and yet many do it with money myths in mind. It seems there has been a huge chunk of the population that became homeowners for the wrong reasons.

Keeping the Mortgage Interest Deduction

I’m in the car and I’m upset because the conversation is really not making any sense. Two friends are in a position to completely own the houses in a few years. The other person says ‘My financial advisor says never pay your mortgage off. You’d be giving up your tax break.”

NoNoNoNoNoNoNoNoNoNoNoNoNoNoNoNo!

First off, who is his financial advisor? I want to know because if he is repeating what that guy told him then that ‘advisor’ is an idiot and is hurting his clients. Are you willing to spend a dollar just to get a quarter back? If so, please send me said dollar and I will gladly send you a quarter.

Taking the mortgage interest deduction while paying down your mortgage makes sense. The problem is that when you delay paying off your mortgage just for the mortgage interest deduction, then you’re paying so much more in interest payments to your mortgage company.

Get Some Free Money with the $8,000 Tax Credit/ $6,500 Tax Credit

Getting some ‘free’ money in the form of the tax credit is another popular reason I’ve heard and read that people used to justify buying a house.

Going back to the list I had mentioned, you’ll probably be spending much more than $8,000 just with your property taxes over the life of the loan. You really have to run the numbers yourself when you are house hunting.

Eligibility for the First-Time Home buyer Credit for $8,000

There are some requirements you have to meet before you can get the First-Time Homebuyers credit.

  • You must be a first-time home buyer and you must have a purchase contract by April 30, 2010 and closes by .
  • The house you purchase must be your primary residence and is not greater than $800,000.
  • The buyer must live in the home for at least three years after the purchase date. You will have to repay the credit on a home only if the home ceases to be your primary residence within 3 years from the date of purchase. The full amount of the credit received becomes due on the return for the year the home ceased being your principal residence.
  • The income limits have been raised for singles to $125,000 and married to $225,000.

Eligibility for the Existing Homebuyer Credit of $6,500

  • You must have lived in your current residence for 5 of the last 8 years.
  • The house you purchase must be your primary residence and is not greater than $800,000.
  • The buyer must live in the home for at least three years after the purchase date. You will have to repay the credit on a home only if the home ceases to be your primary residence within 3 years from the date of purchase. The full amount of the credit received becomes due on the return for the year the home ceased being your principal residence.
  • The income limits have been raised for singles to $125,000 and married to $225,000.

What If You Really Want to Buy a House?

Buying a house can be a great financial and personal goal to have. You have basically have some options to look at carefully before you make a final decision.

  • Be patient and wait a bit until you buy your house. Give yourself more time to have a bigger down payment. This will lower your mortage loan amount you’d need. Prices could stay lower than normal with unemployment problems continuing.
  • Focus on getting a starter home. You can still buy a home, but you might consider getting something a more inside your price range, so you have bigger amount of wiggle room. If you’re buying your first home, a starter home can a better option. You may upgrades years down the road or you might find you like the house and stay.
  • Go for the home. If you’re in a position to get the home you want, that’s great. Just make sure you double check it is something within your budget. Otherwise, consider the first two options.

Thoughts on Home Buying Myths

What are some home buying myths that you’ve heard?

by Elle Martinez

Elle Martinez helps families at Couple Money achieve financial freedom by sharing tips for reducing debt, increase income, and building net worth. Learn how to live on one income and have fun with the second..

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  1. We bought a new medium sized and priced house, and then made extra payments each month, and it worked out great (of course it helps that the stock market was horrible these last 10 years).

    My biggest mistake was not buying a used starter home. I would have loved to have a decent cheap home (or better yet a duplex), to rent out today…

    I would like to buy another bigger house, but my kids love the house we are in. So we’re not going to buy a new house anytime soon…

  2. I’m glad you had an extra payment system for the house. Sounds like you’re raising some great kids who appreciate what they have.

  3. Definitely don’t buy a house unless you have a decent emergency fund/savings built up. We bought our first home with a decent down payment (gift from a family member), but we had no savings and a huge amount of debt. Now nine years later, we have mountains of MORE debt… how we got here is a long story, but don’t buy unless you have saved above and beyond that down payment!

  4. MY wife and I rented for 10 years before building a new home. Why did we wait? We couldn’t afford it. Somone buying a house needs a written budget for sure. A good down payment is good as well. Good post.

  5. Great post and you make many excellent points about why people shouldn’t buy a house until they really need one and they’re ready for it – i.e. they can afford it!

    Regarding the $8,000 tax credit, another reason not to make that the reason you buy a house is that people are seeing delays in the processing of the credit. Besides a host of new paperwork required when filing for the credit, the IRS has said that they will not allow the credit to be taken on tax returns filed electronically, so if you plan on using e-file you’d better not plan on seeing your tax credit for an extra month or more.

  6. Another reason to wait and build up your downpayment is because you don’t need PMI if you can make a 20% downpayment.

  7. After having sold our home in Feb 2007 to relocate for a new job, we decided to rent given the uncertain market. We’re glad that we did because the value of the home that we’ve been renting has plumeted over $100K! Of course, we were told that we were insane for renting, blah, blah, blah. Yeah, who was the insane one?

    I left my corporate job recently to spend more time with family and freelance, so we’re moving again to be closer to family. As a result, we are getting ready to buy a home again and do feel some pressure to do so before the tax credit expires. We’ve been under contract, but thankfully the sellers were uncompromising when it came to the extensive repairs that had to be done as a result of the inspection, so we walked. Now, I’m getting cold feet and not sure that I want to own right now…is that just silly?

    I love the argument about the tax benefit of mortgage interest; the benefit is the highest at the beginning of the loan (when interest is highest) and if you don’t have enough itemized deductions (to equal the standard deduction) BEFORE the interest, then having mortgage interest does you NO good tax-wise.

  8. Broke people should not buy homes. Lenders allowing broke people to buy homes is why were in the foreclosure mess we are in. Home ownership is not a right, despite what our culture tells us. Fact is, many people may never be able to afford a house.

    If you can’t put 20% down, and get a fixed rate 15-20 year loan, I would not buy a home. Do not buy a home if you have tons of debt and No emergency fund.

    Also do not buy a home that is dependent on two incomes. That is another typical mistake couples make.

  9. Homeownership is also more risky than renting. This is one other factor that many do not consider. If you purchase a home, you are committed to the location that it is in….schools, crime, etc. If the neighborhood deteriorates, a homeowner is the loser, but a renter can just move. The opposite is also true for a neighborhood on the rise.

    The renting vs. buying debate needs to be examined for each situation, not only with a calculator, but also with intuition about other factors such as length of time to stay in a place, employment environment (for both current and future), and overall appeal of the neighborhood.