First-Time Homebuyers: Financial Missteps and Opportunities

Posted on Mar 23 2018 - 2:16pm by Jameson Doris
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Steve WilliamsSingle women continue to outpace single men as homebuyers in the U.S. housing market. Last year, single men only made up 8 percent of homebuyers, while single women made up a whopping 18 percent, according to the National Association of REALTORS®' (NAR) 2017 Profile of Home Buyers and Sellers.

Related: Where Are Women Buying Homes?

The profile also reveals that women in the U.S. continue to earn less than men in the same position, and struggle with debt more often than men.

Whether male or female, all homebuyers need as much information as possible when entering the housing market, so we decided to speak with an expert who can shine a light on this topic.

Here, Steve Williams, SVP and head of Financial Planning for BMO Private Bank, chats with us about knowing how much home you can afford, the tax bill, and more.

What are the most common financial missteps new homebuyers should avoid?

Buying too much house and not picking the right type of mortgage. If the price of the home is too high, the new homeowner might be tempted to pick an adjustable rate mortgage (ARM), or, even worse, an interest-only mortgage. The ARM rate can fluctuate after the initial term; for example, a five-year ARM purchased when the interest rate is 4 percent in a rising rate environment could then become a 6 percent interest rate, greatly increasing the monthly payment.

Interest rates have been edging up recently, but are still near historic lows, so assuming the new homeowner is confident they will live in that home for the foreseeable future, a traditional 30-year mortgage is probably the best bet. That rate is currently close to 4.5 percent, so be wary of ARMs, or, even worse, interest-only loans.

What's the easiest way to calculate how much home you can afford?

I strongly encourage people to consider the industry-accepted 28 percent rule, which means aiming to have monthly housing expenses (principal/interest/taxes/insurance) less than 28 percent of gross monthly income.

What are some tax breaks that first-time homebuyers can take advantage of?

One of the qualifying exceptions to withdrawing IRA funds prior to age 59 1/2 is for first-time home purchasers; however, taxes would still have to be paid at the current tax rate, so there is no tax break other than that you don't have to pay a penalty. A comparison should be done for the long-term cost of reducing retirement funds versus using those for the home purchase.

How will the new tax bill impact homebuyers? 

The two main effects of the new tax law are the elimination of interest deduction for a second mortgage, such as a home equity loan, and mortgage interest deduction is capped at debt for home purchase of $750,000.

What would you tell any first-time male or female homebuyer to keep in mind as they go through the home-buying process?

Regardless of gender, we think any big financial decision such as purchasing a home should be part of a comprehensive financial plan. In other words, complete a financial plan and see how the home purchase fits with your long term goals, other expenses and income.

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