Homeownership may still be the cornerstone of the American Dream, but buying a house is not easy. In today’s market, there are some very real challenges to homebuying. These include saving for a down payment (experts recommend at least 20% of the overall value of the home, when possible), juggling other financial responsibilities like student loan debt and caring for family, and planning for long-term savings. Still, the advantages of homeownership, such as building equity in a home with the money you were putting toward rent, often outweigh any stresses. Additionally, purchasing a house is considered a pivotal personal financial milestone for many. If buying a home is in your near future, now might be a particularly good time to start making moves. Here are the main reasons why:
1. Rising interest rates mean higher costs down the road.
The Federal Reserve, the central banking system of the U.S., has already raised interest rates several times since the beginning of 2018, and there may be yet more raises coming in the future. When interest rates go up, there is often a direct effect on consumers and how they access credit. In the last year, mortgage rates have gone up about 1.00%. If you are planning a home purchase in the near future using a fixed-rate mortgage, it makes sense to lock in a lower rate right now before rates go even higher.
2. New tax laws could mix together in your favor.
It is no secret that people are confused by elements of the new tax law. Depending on whom you talk to, now is either the best or worst time to make certain moves with your money. While the current tax code limits tax savings with regard to homeownership — like the $10,000 cap on the deduction for state income, sales, local, and property taxes combined — other changes, like the doubling of the child tax credit to $2,000 per child and a jump in standard deductions from $6,350 to $12,000 for single taxpayers and from $12,700 to $24,000 for married couples filing jointly, could help compensate for any of those other losses.
3. Your mortgage interest is likely still deductible, to an extent.
For most Americans, deducting mortgage interest on their taxes is still a viable way to cut back on the costs of homeownership. Homeowners can deduct mortgage interest on an up-to-$750,000 loan balance, which means the average American buying a modest home can still fully deduct their mortgage interest. On the other hand, it is worth noting that the deductible mortgage interest was lowered from a mortgage debt limit of $1 million to $750,000 with the new law. This especially affects people looking to buy in cities like New York or San Francisco, where property values are higher. Remember that all of these deductions only factor into your taxes if you decide to itemize on your tax return. If you will be taking the increased standard deduction, then this will not impact you.
4. High earners stand to save quite a bit in taxes in general for 2018.
What you actually end up paying in taxes depends on many different factors, yet recent changes to tax rates and tax brackets mean that Americans making over $100,000 stand to save on taxes for 2018. According to the Tax Policy Center, average after-tax income in 2018 will rise 2.2 percent for the country overall, with taxpayers in the middle-income quintile (that’s an income between $49,000 and $86,000) seeing an average increase of $900 and higher earners getting an even bigger increase. Considering your eventual tax savings, locking in a decent interest rate to buy a house now might be a great way to invest your money and help it grow even more down the road. Working with a tax professional is the best way to get the most accurate assessment of your situation.
At the end of the day, the “right” time to buy a house depends on a number of different factors. Jumping into homeownership is a big step and one that should not be taken lightly. Outside of personal financial considerations, it is important to gauge the current economic climate and to be as knowledgeable as possible about what taxes and fees you might owe. If you need help determining whether now is a good time to buy a home based on your current financial situation, a financial planner is a great resource.