How much did your paycheck increase because of the tax cut? I’ve spoken with people whose increases were between 2 percent and 3.3 percent. The benefits for working-class people from the tax reform continued to pile up since I wrote about this topic in January. Here are just a few highlights, demonstrating the wide range of benefits to Americans. Because of tax reform:
— Apple will pay $38 billion in new taxes and add 20,000 new American jobs.
— Duke Energy will cut rates for its customers.
Like Apple, Exxon will repatriate $50 billion, ending their overseas tax shelter.
— FedEx will contribute $1.5 billion to their employees’ pension plan and increase pay for hourly workers by $140 million. It will also invest $1.5 billion to expand its facilities.
Not surprisingly, the University of Michigan’s consumer-sentiment index in February was 99.9, its highest level since 2004.
So, you may be thinking about what to do with your windfall. No, it isn’t enough to buy a house, but it might make the difference between your ability to rent and buy a home.
If you have any credit-card debt, it is likely at a very high interest rate, so I would suggest paying down credit card bills first.
Let’s consider the difference between renting and owning. In Robeson County, you can buy a nice, three-bedroom home for $100,000. A monthly rent on such a home might cost about $900. If you buy the home and put 10 percent down, you would have monthly mortgage payments of $571 for 30 years. If you put down less than 20 percent, you will likely have to pay private mortgage insurance of about $40 a month. Your homeowner’s insurance might be about $50 a month and your property taxes, $100 (in Lumberton city). So, your monthly total would be $761 and part of that payment is building equity in the home as the $90,000 amount the bank “owns” dwindles each month as your share of the home ownership increases.
A conventional loan today requires 20 percent down. That monthly payment for a 30-year loan at 4 percent is $528. There is no charge for PMI, so the monthly cost is only $678.
The ownership situation is even better because if you itemize deductions on your tax return you will be able to deduct your property taxes and the interest portion of your mortgage payment.
You can see why home ownership is such an attractive option, and one of the best ways to build wealth. It typically doesn’t make sense to buy a home, though, unless you are fairly certain you will be living in the area for at least three years. There are transaction costs associated with buying and selling a home. Home ownership also carries the risk of fluctuating in price. It is possible to buy when prices are high and sell when they are low, resulting in a loss. I’m in the process of selling a property in Robeson County now and the loss is substantial, so I probably would have been better off renting rather than buying.
If you know you will be living in an area for several years, I would recommend buying. For most people, the hardest part is saving for the down payment. Although $10,000 or $20,000 may sound like an insurmountable amount of money to raise, all I can say is start small, but start now. And, don’t give up. One intangible benefit is the satisfaction of looking around your home and knowing that you own it.
Eric Dent, a former professor at The University of North Carolina at Pembroke, now teaches at Florida Gulf Coast University.