The Personal Finance Podcast
How to Finance a Starter Home In This Market! (Money Q&A)
Wed Jul 19 2023Description
This episode covers various aspects of financing and buying a home, including down payments, mortgage rates, refinancing, closing costs, and additional expenses. It also explores tax considerations in retirement and provides insights on estimating the cost of having a baby. The episode emphasizes the importance of staying within budget and considering long-term financial implications.
Insights
Financing a Starter Home
To finance a starter home, aim for a 20% down payment and keep housing costs below 30% of income. Rolling equity from a previous home is possible with a 20% down payment.
Tips for Buying a House
Consider the total cost of ownership, improve credit score before buying, shop around for mortgage rates, and lock in an interest rate. Paying for points and refinancing are options to explore.
Factors to Consider When Buying a House
Factor in maintenance and capital expenditures, get a home inspection, and budget for moving expenses and repairs. Closing costs and Private Mortgage Insurance (PMI) should also be considered.
Additional Costs and Considerations
Account for furniture and decor costs, HOA expenses, utility bill changes, property taxes, homeowners insurance, and potential PMI. First-time home buyers have various financing options.
Tax Considerations in Retirement
Retirement taxes depend on income sources and whether they are taxable. The standard deduction, healthcare deductions, state taxes, and Social Security taxation should be considered.
Tax Considerations for Investments and Other Income
Roth accounts offer tax-free contributions and withdrawals. Tax rates apply to investment income, rental income, and other sources of income. Proper tax planning involves setting up different tax buckets.
Tips for Estimating the Cost of Having a Baby
Use a script to ask hospitals about the cost of having a baby. Address objections from hospitals by asking specific questions. Request ballpark figures for common birth costs.
Chapters
- Financing a Starter Home
- Tips for Buying a House
- Factors to Consider When Buying a House
- Additional Costs and Considerations
- Tax Considerations in Retirement
- Tax Considerations for Investments and Other Income
- Tips for Estimating the Cost of Having a Baby
Financing a Starter Home
00:01 - 06:34
- The rule of thumb for financing a starter home is 20% down payment, spending 30% or less of monthly income on housing costs, and purchasing a home that is no more than three times your income.
- It's important to avoid becoming house poor by keeping housing costs below 30% of income.
- For second-time homebuyers, rolling equity from the first home into the next one is possible with a 20% down payment.
- PMI (Private Mortgage Insurance) can be avoided by putting down 20% or more on a home purchase.
- Saving up 20% for a down payment can be challenging, so being flexible on the down payment amount while keeping mortgage payments at or below 30% of income is reasonable.
Tips for Buying a House
06:09 - 11:57
- Saving up 20% for a down payment on a house is becoming more difficult due to the tough market conditions.
- Having a mortgage payment that is 30% or less of your income is key when buying a house.
- Consider the total cost of ownership when evaluating if a house is worth it, including fees and maintenance costs.
- Houses are not great assets in terms of appreciation, so don't rely on them solely for building wealth.
- Improving your credit score before buying a house can save you thousands of dollars in interest payments.
- Shopping around for the best mortgage rate is important, especially if you plan to stay in the house long-term.
- Locking in an interest rate is crucial to avoid potential increases that could cost tens of thousands of dollars.
- Paying for points, or buying down your interest rate, may be an option to consider depending on your situation.
- Refinancing the mortgage is another option to explore in a high-interest rate environment.
Factors to Consider When Buying a House
11:27 - 17:30
- Paying for points is buying down your interest rate by paying an upfront fee.
- The fee is typically about 1% of the total purchase price of the house.
- Buying points can be beneficial if you plan to stay in the house for a long time.
- Refinancing the mortgage may not be worth it if you think interest rates will go down.
- To calculate the break-even point, divide the cost of the point by the monthly savings.
- Closing costs are fees paid to close on a house and can range from 2% to 5% of the purchase price.
- Getting a home inspection is essential before buying a house.
- Moving expenses should be factored into your budget when buying a house.
- Home repairs and maintenance should be considered as part of total cost of ownership.
Additional Costs and Considerations
17:02 - 23:21
- Factor in maintenance and capital expenditures when buying a house, such as roof repairs and painting costs.
- Consider the cost of furniture and decor when moving into a larger house.
- Account for HOA expenses and changes in utility bills when transitioning to a new home.
- Research property taxes and homeowners insurance costs before purchasing a house.
- If putting less than 20% down, factor in Private Mortgage Insurance (PMI).
- First-time home buyers have options like FHA loans (3.5% down), conventional loans (3% down), VA loans (0% down for active duty), USDA loans, down payment assistance programs, and seller financing.
- Follow the rule of spending no more than 30% of your monthly income on housing.
Tax Considerations in Retirement
23:01 - 29:36
- Taxes in retirement depend on two key factors: what the IRS qualifies as income and whether that income gets taxed.
- The standard deduction is important in retirement as it reduces taxable income, and the amount depends on filing status.
- Retirement income, including Social Security, pension, and withdrawals from retirement accounts, determines taxable income and tax bracket.
- Healthcare costs can be tax deductible in retirement, reducing adjusted gross income (AGI).
- Required minimum distributions (RMDs) from retirement accounts are generally taxable as ordinary income.
- State taxes vary, so retiring in a state with better tax laws or snowbirding can be advantageous.
- Social Security benefits are partially taxable based on provisional income; up to 85% may be subject to federal taxes.
- Pensions and withdrawals from pre-tax retirement accounts are treated as taxable income.
- Withdrawals from Roth IRAs are not taxed since taxes were already paid on the contributions.
Tax Considerations for Investments and Other Income
29:12 - 35:10
- Contributions to Roth accounts like Roth 401k and Roth IRA are tax-free.
- Withdrawals from Roth accounts in retirement are not taxed.
- Taxable investment income, such as dividends, interest, and capital gains, is subject to specific tax rates.
- Long-term capital gains tax rates apply to investments held for one year or more.
- Rental income is considered taxable income and subject to federal income taxes.
- Other sources of income like part-time work, business income, and annuity payments are also taxable.
- Setting up different tax buckets is important for proper financial planning.
Tips for Estimating the Cost of Having a Baby
34:49 - 38:00
- A script can be used to ask hospitals about the costs of having a baby.
- Objections from hospitals about providing cost estimates based on insurance can be addressed with specific questions.
- Asking for ballpark figures of common costs associated with a typical birth can help with budgeting.