Home Ownership and Military Life
With this military lifestyle, you’re probably well versed in the regular schedule of moving. At this point, you’ve set up a routine for the packing and unpacking chores. Maybe you’ve organized binders for your important paperwork or followed the checklists in the complimentary ebooks from MilitaryByOwner. Most likely, you’re fully prepared for whatever the annual PCS season might bring.
Now let’s say something unexpected happens. A military assignment comes along where you won’t immediately pack up and move again. This could change everything! Since you will actually stay in one place for several years, you can finally purchase your own home. By doing so, you could feel more settled, have a place to call your own, and be more connected to your new community.
If an upcoming PCS has you considering buying a home, you’ll need to consider five different areas.
1) Financial Preparedness
Buying a home is a big decision. Before diving into the water of the homeownership pool, you’ll want a bank, credit union, or lending institution to review the status of your finances.
By evaluating your credit and the history of your accounts, the mortgage lender will inform you how much they’re willing to loan out. After a thorough examination of your financial report card, you’ll be given a letter of pre-approval.
Keep in mind, this statement of pre-approval does not obligate a lender to give you a loan. Having pre-approval for a mortgage simply helps narrow down the price range for your house hunt.
Do you have money saved for a down payment?
While you’re thinking about buying a home, you’ve most likely gone over how much money you’ve saved up.
- If you plan to place money down on a home, a lender can work with you to find a competitive interest rate.
- If you don’t have money available for a down payment, you may be eligible for the favorable terms of a VA Loan.
- If you prefer not to go with a VA Loan and do not have a down payment, you’ll note an insurance fee tacked on to your monthly mortgage payment.
Adding to a savings account and building good credit does take time. But if you can tuck away funds and reduce outstanding debt, your efforts will pay off with a lower interest rate on a home loan.
Can you cover the closing costs?
Having lined up your financing, you can feel confident placing an offer when an ideal house comes along. With the closing settlement, there are often a series of expenses that add up. These charges can range from a few hundred to several thousands of dollars. Of course, some of the closing costs could be rolled into the home loan.
As the post Making an Offer on Your Dream Home explains, you could negotiate to have the home seller cover the closing expenses. Simply plan ahead for any bills that may need to be paid at the closing appointment by having a healthy reserve on hand.
2) Tax Benefits vs. Actual Costs
Yes, the mortgage deduction on your income taxes is significant! But, does it overcome the money that you will outlay on closing costs, repairs, upgrades and homeowner association fees for just a few years of ownership?
One cost is mortgage interest-- the money you pay for the use of someone else's money when you borrow funds to buy a house. Although mortgage interest is a large part of your housing payment, you can deduct this interest from your taxable income on your federal income tax return and (in some states) on your state income tax return.
This can save you a fairly substantial amount of income tax. In addition, you will pay property taxes on a home that you own. Those property taxes are also deductible from taxable income on your federal income tax return and some state income tax returns, and thus offer you additional income tax savings.
This tax benefit effectively decreases your monthly home expenses (which include mortgage payment, real estate taxes, homeowner’s insurance, and any association fees) and should be taken into account to determine the true cost of home ownership. Keep in mind that if you are renting, you are probably covering the costs of someone else’s ownership, but not receiving any of the tax benefits.
3) Expected Time at Current Duty Station
Before you invest in real estate, it’s good to gauge the length of time that you’ll expect to reside in that home. Markets that were once assured to appreciate may now be either stagnant or on the decline. Once you have outlaid savings for closing costs or a down payment, a short term home ownership may not redeem those debits to your precious savings.
However, if you’ll be stationed at your upcoming assignment for years rather than months, it might make sense to buy a place rather than pay rent. Evaluate the expected costs of purchasing and subsequently selling your home, divide that by the number of months you expect to live there, and then add that to your monthly mortgage payment and other home expenses. This will yield your actual cost of short-term ownership by which you can compare rental costs. Keep in mind that this evaluation only works in an ideal market where you can sell or rent your home immediately after you put it on the market.
4) Housing Market Climate When You PCS
While hunting for a house that fits your needs right now, it’s also important to think of the resale appeal for later. Even though you hope to stay at this assignment for a few years, you’ll eventually transition again. When your next military orders come along, it helps to have a plan for what you’ll do with your home. Would you lease it or list it for sale?
Pros of renting the house:
- The property could appreciate
- Tax benefits of owning an investment property
- Rental income could offset some homeownership costs.
Cons of renting the house:
- Cost of repairs and maintenance
- There could be tax concerns over selling a property previously used as a rental
- The tenants may not be conscientious about upkeep
- Unreliable income if there’s a gap between tenants.
Pros of selling the house:
- Any possible equity in this home could be rolled into your new home purchase
- The capital gain from this sale would be virtually tax-free if you put it toward another home purchase
- The ease of owning only one home at a time.
Cons of selling the house:
- A qualified buyer may be hard to find
- The house could sit empty after you PCS
- Loss of potential appreciation if you could instead hold the investment for a few years.
5) Personal Considerations
You have to know yourself, and what you are willing to do or do without. Owning a home means that you fix or pay someone to fix that broken toilet or fence. If an appliance stops working, there won’t be a landlord to call.
Consider if your monthly income is prepared for a repair hit once in awhile or if you really love working on your home. Upkeep on yards, the home exterior, and normal maintenance should be factored into your budget when making your decision to buy. To cover some of these additional costs, you may have to give up some things you are used to having in your budget.
Finally, do you have the stomach for home ownership? Would the possibility of being an absentee landlord fray your nerves? Does watching the housing market make you feel like you’re riding a roller coaster? These are all questions that you need to ask yourself as you make the decision to rent or buy.
If you decide to buy a home, be sure to take a look at the extensive home buying resources offered by MilitaryByOwner to get started!
By Michele Allen, updated 2018 by Mary Ann Eckberg.