The leap from renting to owning is an exciting one, which leaves many first-time homeowners wondering if (and when) they should buy a house. As we turn our calendars to 2021 — and with so much activity within the housing market — is this year to take the plunge? You’re not alone if you’re contemplating this question. As a CPA firm, we work closely with clients navigating the MCC tax credit (a first-time homeowner perk), so we’re here to help you make the right decision.
The Difference Between Renting and Buying
Let’s start with the basics. There are advantages to both renting and owning, so it’s essential to consider the differences before becoming a first-time homeowner.
As a renter, you sign a lease, pay your rent and utilities, and call it a month. Maybe you cringe every calendar turn knowing that your money isn’t going towards an investment of your own, but not having to worry about other expenses is an advantage. If appliances break or there are plumbing issues, the homeowner is who typically handles those expenses.
Take the roof, for example. Roofs need replacement every 20-25 years and would probably cost around $5 per square foot. That’s a significant expense that renters don’t need to pay. And the roof is just one example of regular maintenance. Other routine maintenance includes chimney cleaning, exterior and interior painting, upgrading appliances, maintaining HVAC systems, yard maintenance, plumbing, and more. All of that adds up.
As a homeowner, you have to worry about those extra maintenance expenses, plus taxes, fees, insurance, and more. The advantage here is that your money is investing in something that will most likely appreciate. On average, homes appreciate at an annual rate of 3-5% nationally. So, if you buy a home for $150,000 and maintain it well, in ten years, it could be worth about $225,000.
Because you’re paying for upkeep and maintenance, as mentioned above, that appreciation helps fuel those costs. But specific neighborhoods, cities, regions, or even events can produce higher rates. Consider the tech boom, which caused lasting housing value effects on areas like the San Francisco Bay Area and Seattle. Over the past ten years, San Francisco’s average annual appreciation rate has been closer to 7%, whereas Seattle has been about 6.3%. Both are above the national average.
What’s the Best Time to Buy a House?
Although there isn’t any magic calculation on the exact time to buy a house as a first-time homeowner (or, really, any homeowner), there are some trends that can help you decide. To summarize a previous blog post of ours, late summer or early fall tend to be ideal times to buy a house. After the rush of the summer, housing inventory is still high, which keeps prices at bay. Once that inventory shrinks, though, prices go up.
But, buying a house is less about the perfect price and more about when it’s right for you. So as you enter 2021 with dream homes on your mind, consider if it’s right for you financially. Do you have enough savings for a downpayment? Is your credit score high enough to get a reasonable interest rate? Is this your first home? All these questions are critical to consider before diving into homeownership.
First-Time Homeowner Perks
If you're financially ready to buy a house, then any year is an excellent year to do so! And if you’re a first-time homeowner, you can save more money on your significant purchase. As mentioned above, we specialize in the MCC tax credit. Our CPA firm is eagerly anticipating tax day 2021, so we’re already helping our clients get their paperwork in order. If you’re a first-time homebuyer, perhaps some of these perks can help you, too.
MCC Tax Credit
Our website has all the information you need to know about the MCC tax credit, so we’ll sum it up here quickly. This tax credit is for those who fit the definition of a “first-time homeowner.” You either need to be purchasing your first home ever, buying your first home since at least three years ago, looking in designated neighborhoods that need a housing boost, or be retired or active in the military. If you fall into any of those categories, then you can benefit from the MCC tax credit.
First-time homeowners can earn up to $2,000 annually throughout their entire home loan. For a 30-year loan, that’s saving $60,000. It all depends on where you live and what percentage you can claim on the interest you pay on your home loan. Every state is different, so those in Texas will receive their rate from the Texas Department of Housing and Community Affairs (TDHCA MCC). But when it comes time to file your taxes, you can use any CPA firm.
Here in Pennsylvania, we serve clients across the nation and abroad. For our local first-time homeowners, they’ll use other forms like the PHFA 1098. This form tells you how much interest you paid that year on your mortgage. We use the PHFA 1098, yes, but those working with the TDHCA MCC in Texas will use their state’s form. Universally, everyone will also need to file Form 8396, which you can find on our website.
Mortgage Interest Deduction
Unlike the MCC Tax Credit, any home buyer can benefit from a deduction. The Mortgage Interest Deduction reduces the interest that homeowners pay on their loans from their taxable income. You can use this perk on either your home purchase or home upgrades, so it’s more versatile than some tax benefits.
All states have their programs to help homebuyers, whether it’s your first home or not. In Texas, for example, there’s the Texas State Affordable Housing Corporation, which allows buyers to deduct a large portion of their interest. You can combine this perk with other tax breaks related to down payments and closing costs. Another example is in the city of Oakland, CA, which provides a Mortgage Assistance Program. This program provides funds to reduce closing costs and down payments.
Home Buying in 2021
So, back to the question: Is 2021 the year to buy a house? If you’re financially and personally ready to take on the responsibilities and enjoyment of homeowning, then yes, of course, it’s a great year to buy a house. It doesn’t matter when as much as it matters if you are ready.
However, because 2020 was such a unique year, keep your eye on the 2021 housing market. Last year, many people relocated due to the pandemic, which increased demand in an already large supply year. Housing prices grew, but mortgages fell to a record low. Many experts predict that housing sales will increase this year and prices will rise over 5% — some saying up to 10%. Further, due to the pandemic, construction companies face challenges in providing new builds. So, eventually, supply will go down, and prices may increase even more.
This situation will make it hard for low-income earners to enter the market and essential for first-time homeowners to take advantage of those perks! If you plan to buy in 2021, consider looking around earlier in the year. Ignore the late-summer-early-fall trends, as this year will not follow the usual course. When you find the home that’s right for you financially and personally, then that’s the perfect time to buy a house.