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Rent Vs. Own

Tired Of High Rental Payments That Constantly Spiral Higher?Rent vs. buy-that is the question

Maybe It’s Time To Buy Your Own Home

It may be time for you to analyze the question of Rent Vs. Own. When you're struggling in a chokehold of high and ever-rising rents, it's hard to get ahead.

Three Reasons To Consider Buying

If you're thinking it might be time to buy your first home, use this page to make an educated decision. Here are three very important reasons why it may be time for you to consider becoming a first-time homeowner:

1. Ever-Escalating Rental Costs Make It Difficult To Get Ahead Financially

Out-of-control rent increases are the biggest reason to consider buying. If you’ve been living and working in the Silicon Valley for a while, you’re very familiar with this problem. You’re getting tiny increases in salary and huge, unpredictable, and unrestrained increases in rent. Every year, you worry about how your budget might be wrecked again this year. Tenants have few (and often no) protections against greedy rent increases. It’s hard to create wealth for your future.

2. Building Equity In Your Home Means You’re Building Wealth

First-time homeowners often don’t understand equity. Simply put, it means the current $$$ value of your investment in a home. It’s what you could get out of selling the home once your mortgage and other obligations are paid off. In general, equity starts with your down payment and grows every month with your principle payment. This Buy Vs. Rent Calculator should demonstrate the concept.

3. Owning A Home Can Reduce Your Income Taxes

Homeowner tax deductions can completely change your income tax obligation. Once your income reaches a certain point, owning your home can decrease your income taxes every year. Home ownership entitles you to many tax deductions which may make owning a home your smartest financial move.

This is an issue that few first-time homeowners understand. We’re not tax experts and cannot advise you on this. Consider investing in a consultation with a CPA about your particular situation. Find out how buying a home would affect the amount of income tax that you’ll legally be required to pay. You’ll likely be surprised and probably pretty excited once you fully understand why owning your home is a smart tax move.

Can you afford your own homeTools To Figure Out The Numbers For Your Own Situation

1. Calculate The Costs of Rent Vs. Own

Here's a great tool you can use to figure out the Costs To Rent Vs. Costs To Own. It's pretty self explanatory. When you put your cursor in an input cell, you'll see that an explanation will appear to the right. Some of the answers might not be obvious to you at first, but here's a few ideas to get you started in using this tool.

  • Put your current monthly rent in the Monthly Rent input field.
  • Monthly rental insurance is your monthly payment for Renter's Insurance.
  • For Expected annual inflation rate (%), if you don't know this, you can just leave it at 4%. If you know the real rate of inflation, put that number in.
  • When you're just getting started, you likely won't know the Purchase price of home ($). You can plug in all the other numbers, then experiment with other prices and see what kind of answers you come up with.
  • Just put 30 years for the Length of mortgage term (# of years). As a new buyer, that's likely the term of the mortgage you will get. You can always experiment with the numbers later.
  • To find the mortgage rate for the Mortgage's annual interest rate (%), click this link to go to the Mortgage Rates page of this site. These rates are updated daily. See what the current mortgage rates are and use that figure for your estimation. Start off with the Fixed Rate figure. If you want to experiment with the other two rates, try that out also.
  • For the sake of simplicity, just put a zero in the Discount points on purchase of home (%) input field. Most first-time homeowners don't have the additional funds to pay points and reduce the interest rate. If you do have such funds, you can experiment and see what the difference could be for you if you pay points.
  • Origination fees are the costs of processing the loan plus all other sorts of fees. This calculator suggests up to 1%. That seems high and you can check with with various lenders later. At this point, just leave the 1 (%) figure in until you become more informed.Buy your own home
  • For Other loan costs ($), just put zero at this point. You can add these figures in later once you become more knowledgeable. At this point, let's assume that Origination fees covers all these costs as well.
  • As long as you have a 20% down payment, you can put zero in the Mortgage Insurance (PMI %) input field. If you do not have the 20% down, you'll be paying Private Mortgage Insurance of  0.2% to 0.5% of your principal balance each month. If you don't know what this figure is, you'll just have to estimate it until you get more details.
  • For the sake of simplicity, you can just put zero in the Average monthly maintenance ($) input field. You're unlikely to know what is a realistic figure until you have done some research.
  • For the Santa Clara County Property Tax Rate, you can use 0.794% and multiply it times the sales price of a home (the estimated price of a home you can afford). Please know that there are often other special tax assessments added to that 0.794%. You are unlikely to know the actual tax amount until you have selected a home and know what specific taxing districts the home is subject to. Once you've calculated the dollar amount of the tax, put it in this input field.
  • State plus Federal income tax rate (%) means the tax rate that is applied to your income when you file your income taxes. That figure is used here so that your taxes and tax savings are included in the Rent Vs. Own calculation.
  • Interest rate you expect to earn on savings (%) simply means the interest rate that you'd expect to earn on your savings if you decided to rent and got interest on your down payment instead of investing it in a home. Most likely .5% to 1% has been realistic for the last few years. Obviously, if you would expect to earn more on your savings, put that figure instead.
  • For the Expected percentage your home will appreciate by each year (%), 3% is a conservative number. You can do research and find out what the real numbers for appreciation have historically been, but for to keep it simple, just use the 3% to start. Realize that appreciation is not guaranteed. Depending on the market, there are times when your property may not appreciate.
  • For the Number of years you will stay at this property input field, experiment with different lengths of time. You probably want to start with 7 years and go up from there. 
  • Put a zero for Realtor Commission Rate % because the seller pays the realtor commission.

 

2. Understand How Building Equity Means You Can Increase Your Wealth

You may not understand exactly what equity means. For the sake of simplicity, you can thinking of it as a "savings account". When you pay your down payment to the escrow company, it does not disappear. It becomes the beginning of your equity in a home. Every month, the principle portion of your mortgage payment adds to the equity. Please realize that there is no guarantee of this happening. Real estate does go up and down in value. However, in the Silicon Valley, the long-term trend is ever upwards, with periodic "price corrections". Think of owning a home as a tool for building your wealth—while you get to enjoy living in your asset. Here's the information on how you can interpret this calculation of the potential equity you could have in your home:

  • Anticipated Home Price—I've put a low price of a home as a starting point.Calculate how you could afford your own home
  • Down Payment—I've entered a 10% down payment.
  • Amortization—This means the number of years that the loan will last. Most loans last 30 years so I've put 30 in this input field. There are other options, but let's just keep it simple at this point.
  • Custom Rate is not likely to apply so there is nothing you need to do.
  • For Interest Rate, I've used 5%. Current interest rates are lower, but this will give you a general idea.
  • For Current Monthly Rent, I've put in a realistic number for the current rent you are paying every month.
  • For Anticipated Annual Rent Increase, I've put in 3%. In some cases (many), this percentage is much higher, but we'll go with this as an average.
  • Comparison Timeframe means the number of years that you want to compare. I've put in 5 as a reasonable starting point.


3. Educate Yourself About How Owning A Home Can Reduce Your Income Taxes

When you're looking at taking control of your financial situation, it's important to consider how owning a home can reduce your income taxes. Without considering this, you aren't looking at the whole picture of how owning a home can be a major benefit. Home ownership comes with certain tax deductions that effectively reduces the amount of income tax you will pay. 

a. Learn About The Potential Homeowner Tax Deductions You'd Have

Here’s a trusted resource to educate yourself about homeowner tax deductions. Consult a tax advisor for your specific details.

http://www.nolo.com/legal-encyclopedia/homeowner-tax-deductions-29693.html

b. Estimate Your Own Potential Mortgage and Property Tax Deductions (for Income Tax Purposes)

Here’s how you can calculate what your mortgage and property tax deductions might be.

To keep it simple, think of it this way. You can expect to deduct two items from your Gross Income on your tax return. The interest portion of your mortgage payment is tax deductible in addition to the property tax you pay every year. Obviously, from this article, there are other deductions available, but often they don't apply except for the first year of the loan. Here is how you can get a rough calculation of the amount of these two deductions you'd be entitled to if you should buy a home.Find out how you can afford a Silicon Valley home

  • Interest rate deduction: Go to the Affordability Calculator page of this website. Go to the bottom of the page and fill out the Mortgage Qualification Calculator. When you have finished, click the Create Amortization Schedule button. This schedule shows you the total of payments you will pay over the term of the loan. What you're looking for is amount of interest for each year of the term of the loan. That number is the estimated amount of your income tax mortgage interest deduction.
  • There are multiple entries for Property Tax in various of these calculators. Take that annual figure and add it to the total of your annual mortgage interest and you'll have a rough estimate of the amount of your real estate deductions you'll be able to deduct annually from your Gross Income when you do your income taxes. AGAIN, PLEASE CONSULT A CPA to check these calculations. These are only estimates to help you begin the path to home ownership. We are not tax professionals and you need to get professional advice about your decision.

c. Calculate How Homeowner Deductions Could Save You In Income Taxes

Here’s a calculator that shows you the impact these deductions might have on your income tax. The next thing you want to look at is how these homeowner deductions affect the amount of income tax you owe. Again, this is something that you should consult a CPA about in advance of a buying decision. It's not something we're qualified to advise you about. Get real and find out the numbers for your own situation before you make your decision. This calculator will give you a VERY ROUGH estimate of your income tax savings from buying a home. Some of the answers might not be obvious to you at first, but here's a few ideas to get you started in using this tool.

  • For Property value, put the price you expect to pay for a home.
  • For Loan amount, put the amount left after you deduct down payment and closing costs from the Property value. You may want to experiment with various combinations until you come up with numbers that work for you.Move into your own Silicon Valley home
  • To find the mortgage rate for Annual interest rate (%), click this link to go to the Mortgage Rates page of this site. These rates are updated daily. See what the current mortgage rates are and use that figure for your estimation. Start off with the Fixed Rate figure. If you want to experiment with the other two rates, try that out also.
  • For the Loan term (years), start with 30 (# of years). As a new buyer, that's likely the term of the mortgage you will get. You can always experiment with the different numbers later.
  • Points (%) means additional funds that a home buyer pays to "buy down" the long-term interest rate. For the sake of simplicity, just put a zero in the Points (%) input field. Most first-time homeowners don't have the additional funds to pay points and reduce the interest rate. If you do have such funds, you can experiment and see what the difference could be for you if you pay points.
  • Loan closing costs are the costs of processing the loan plus all other sorts of fees. For our purposes, do a quick calculation of 1% times the amount of the loan. You aren't going to know the actual numbers until you get pre-qualified for a loan. Our purposes here are pure estimation to provide you more information on beginning your home buying effort.
  • For the Property tax rate (%), you could enter the Santa Clara County Property Tax Rate of 0.794%. Please know that there are often other special tax assessments added to that 0.794%. You are unlikely to know the actual tax amount until you have selected a home and know what specific taxing districts the home is subject to. 
  • Your state and federal tax rate (%) means the tax rate that is applied to your income when you file your income taxes. That figure is used here so that the calculator can correctly figure your tax savings.
  • Number of years to calculate savings for is somewhat flexible. Start with the number of years you plan to stay in the house. Then experiment with putting the term of the loan to see what your tax savings would be if you stay in the home through the term of the loan. Experiment with other number of years as a kind of "what if" calculation.

 

Educate Yourself About the Rent Vs. Own DecisionThe keys to your own home

Do your own financial analysis to see if home ownership is your smartest financial move at this time. If the numbers don't work for you now, that doesn't have to be the end of your dream. You can put together a plan for your future.

Bookmark This Page And Keep Coming Back

Play With The Numbers Until You Can Come Up With A Strategy To Buy Your Own Home

If you've found this information useful, how about having a conversation about what you've learned and we can talk about your options.


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