BUYER TIPS
What are the benefits of home ownership? The American Dream is to own a home!
Other than the psychic benefits of being an owner rather than a renter, there are two primary financial benefits – building equity (or savings) and tax deductions.
Building equity – Instead of paying rent, ownership allows you to build, over time, an equity stake in the property. Your mortgage payment goes towards interest and principal. Many people view the monthly principal payments as savings. So that when it comes time to sell, you can monazite the equity stake – or savings – you have built up over time. This compares to being a renter, where you have not built up any equity, or savings, in the property.
Tax deductions –Again, your mortgage payments are comprised of both principal and interest. The interest you pay is tax deductible, as are your real estate taxes. In houses and condominiums, real estate taxes are paid separately, whereas with cooperatives, they are embedded in the monthly maintenance payment. And in a cooperative, the corporation may also have an underlying mortgage on the property, so interest payments may also be included in the maintenance payment. Usually the tax deductibility of a cooperative’s maintenance payment is expressed as a percentage of the total maintenance payment.
Your tax savings are equal to the total mortgage interest and real estate taxes you pay each calendar year multiplied by your Federal marginal income tax rate. So, for example, if your interest and real estate taxes for the year totaled $10,000 and your Federal marginal income tax rate is 28%, your tax savings are the product of the two, or $2,800 per year or $233.33 per month.
II. What is the difference between a cooperative and condominium?
In a cooperative,you purchase shares in the corporation that owns the building. These shares entitle you to a proprietary lease that allows you to occupy the unit. You are a tenant-owner in the cooperative, and are entitled to the same tax deductions as if you owned real property (a house or condominium), namely real estate taxes and mortgage interest (for both the cooperative corporation’s mortgage and your own mortgage). Cooperatives also have rules that specify a specific down payment percentage. This can vary from 10% t0 35% of the purchase price. Again, this is a cooperative corporation, not a bank, requirement. Cooperatives also require financial disclosure from the buyer, in the form of a comprehensive purchase application, and approval by the corporation’s board of directors.
The cooperative corporation issues rules, which may limit the right to sublet, or rent, the unit, and restrict the ownership of certain pets. There may also be what is generally known as a “flip tax,” an amount paid to the cooperative corporation when the unit is sold. This payment is typically borne by the seller, and is often expressed as a dollar amount per share or a percentage of the sales price.
Condominiums are considered real property, so you are purchasing the interior (four walls) of the unit plus a share of the common elements (hallways, basement, etc.) of the building. The condominium does not have a down payment requirement, however, your lender may require 10% down. The size of the down payment is dependent on your creditworthiness. A fairly simple purchase application is submitted, and the condominium does have the right of first refusal to purchase the unit. In virtually all transactions the condominium board signs away this right and the property proceeds to closing.
III. What are the financial requirements to purchase a house, condominium or cooperative?
Today, given the recent turmoil in the financial markets, a prospective buyer’s financial wherewithal and solid credit history is of paramount importance. Every buyer needs to consider the following:
Credit Scores –There are three credit rating agencies (Experian, TranUnion and Equifax) that compile information on your use of credit and issue a FICO score than ranges between 300 and 850. 850 being excellent – 300 very poor Usually, from 750 and up is what the lending institutions are looking for in this turbulent financial climate.
Should I buy or rent?
This is dependent on your needs, time horizon, and financial situation.
Your needs… What a family, couple or single person may require in a home.
Your time horizon… The amount of time projected to live in a certain place.
Your financial situation… The affordable amount one can pay monthly.
IV. How much house or apartment can I afford?
This depends on the needs of the family coupled with the financial situation of the purchaser.
V. How long does it take to close on a property, once my offer has been accepted?
It could be as short as a month with an all cash purchase of a house or condo. Usually it is 60 to 90 days from accepted offer to closing. It can be longer when purchasing a coop.
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