Right time to buy a home goes beyond money

Dear Liz: I am 28 and single with no children. I graduated from law school a few years ago and have a relatively stable job at a small law firm. I had previously thought I would wait to buy a house until I’m married, but now I don’t think I should assume that will happen. Since a mortgage in my area would be roughly equivalent to monthly rental payments, renting seems like a waste of money. But the idea of being responsible for major house repairs is a bit daunting. Is this a legitimate concern? What should be the major factors to consider before buying property? How much should I have saved before I buy a house? And is a condo as bad an investment as I hear?

Answer: Despite what you’ve heard, you aren’t “throwing away money” when you rent. You’re not buying a home with your rent money, but you are buying freedom. Renters can move more easily than homeowners, plus they don’t have to worry about the costs of fixing the roof, replacing the furnace or repairing whatever breaks.

The time to buy a house is when you plan to stay put for several years, you can afford to buy a home and, most important, you want to be a homeowner. Homes typically aren’t great investments because in the past, home price appreciation has barely outpaced inflation in most areas. Add in the costs of insuring, repairing, maintaining and updating a house, and you may even have an “investment” that loses money. Still, homeownership is an important goal for many people, and the forced savings of paying off a mortgage can help you build your net worth over time.

It’s a good idea to put at least 10% down when buying a house. That way you aren’t underwater from Day One, since the costs of selling a house and moving typically add up to about 10% of a home’s value. A down payment of 20% will give you an even bigger cushion and spare you from having to pay private mortgage insurance, or PMI. In addition to your down payment, you should have at least three months’ worth of mortgage payments in savings, and you should expect to spend about 1% of the home’s purchase price each year on maintenance and repairs. These are just rules of thumb; you may find you need more savings, but you probably won’t need less.

Opt for a payment you can afford with a 30-year, fixed-rate mortgage. If you can swing the purchase only with the payment on an adjustable loan, you probably can’t afford the house. Also, it’s a good idea to keep your housing expenses (including mortgage payment, taxes and insurance) to 25% or less of your gross income so that you have enough money left over to save for retirement and emergencies while still being able to live your life.

As for condos: In many areas, they lost more value in the recent downturn and are taking longer to recover than single-family homes. That’s been the pattern with most previous real estate recessions, and it reflects the fact that condos in general are considered less desirable than single-family homes. This doesn’t mean a condo is necessarily a bad purchase. But you should look for a quality complex and understand that you may get less price appreciation over time.

Understanding capital gains

Dear Liz: You recently wrote about potential capital gains on the sale of a property that was a gift from the parents. The husband of the seller made $75,000 a year in income and the seller didn’t work. Isn’t it true that if his taxable income remains in the 15% bracket (taxable income of $70,700 or less), they would owe no capital gains tax, at least as it stands for 2012? With standard deductions, he would fall into the 15% bracket.

Answer: It’s true that the capital gains tax rate is zero for people in the 10% and 15% income tax brackets. But the amount of capital gains is added to your other income to determine your bracket.

“The $75,000 of current income plus $85,000 of gain would put them well into the 25% tax bracket and subject to the 15% capital gain rate,” said Mark Luscombe, principal analyst for tax research firm CCH. “A standard deduction of $11,900 plus a couple of exemptions of $3,800 each for 2012 could make part of the $85,000 gain taxed at a 0% rate, but the bulk of it would be taxed at the 15% capital gain rate.”

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