Buying and Financing Your New Home: Find the Right Home and the Best Possible Mortgage in Any Market

By Casey Fleming

Buying and Financing Your New Home helps homebuyers understand the buying process and their options for financing a home. 

Written by a licensed California Real Estate Broker, Casey Fleming’s guide Buying and Financing Your New Home offers a detailed look at how home ownership impacts a family’s finances and the benefits of owning a home. Fleming explains how homebuyers can navigate the home-buying process in a way that yields the best possible results and how to finance their purchase with the lowest possible lifetime cost.

The goal of Buying and Financing Your New Home is to empower the reader during the most expensive transaction of their lifetime. Casey Fleming outlines how to search for and buy a home that is right for a homebuyer’s circumstances, goals, and concerns. He describes their options regarding choosing a lender and mortgage structure that meets their needs, rather than the lender’s. 

When it comes to financing the reader’s new home, Buying and Financing Your New Home makes the complex simple, breaking down the process in an easy-to-understand way.

• Language: English
• Publisher: Morgan James Publishing
• Release date: Feb 7, 2023
• ISBN: 9781636980690

Casey Fleming

A licensed California Real Estate Broker, Casey Fleming has been in the mortgage industry since 1979. He began as an appraiser and built one of the largest appraisal and consulting firms in the San Francisco Bay Area before transitioning into mortgage lending in 1995. Casey led the development of one of the first truly interactive advisory-focused mortgage web sites to be launched on the internet, Loanguide.com, which was named one of the 50 best web sites on the internet in 1998 by CIO Magazine. Casey Fleming’s mission is to help consumers understand the specifics of the mortgage industry and loan products, in order to get the best possible mortgage for their specific needs. He released The Loan Guide: How to Get the Best Possible Mortgage in 2014; his newest book, Buying and Financing Your New Home, breaks down the complexity of finding a home for modern homebuyers. A native of Silicon Valley, Casey currently resides in his 1927 Craftsman Bungalow in San Jose along with his dog, Fozzie Wan Kenobi.

Book preview

Chapter One

Own or Rent?

Let’s just jump right to the heart of the matter. Should you buy a home?

Common wisdom is that your home is the best investment you’ll ever make, and the sooner you can get into the market the better. Up to a point, I agree. The value of real estate invariably has risen given enough time, and it has historically been an excellent hedge against inflation.

But owning a home isn’t necessarily for everyone, and it often happens that folks are encouraged and even convinced to buy homes that are not really right for them.

So, what should you consider when making the decision to buy a home or not?

Reasons to Buy

Following is a list of the reasons traditionally used to argue that you should buy a home. All of them are often true, but have to be considered in context; are they true for you? The reasons not to buy a home may outweigh the reasons to buy a home (and we’ll cover that, too). We can break down the various reasons to buy a home into two categories: financial and emotional.

Financial

Tax Advantages

When you finance a new home, the interest you pay on your mortgage is usually tax deductible, and it can be significant. For an example, let’s assume you are buying a $500,000 house with 20% down. You decide to put $100,000 down and get a $400,000 mortgage to finance the balance of the purchase price. Assume you are able to get a 30-year fixed loan at 4.500%. Your interest cost for the first year would be about $17,868. If your marginal tax rate were 25%, you might save $ 4,467 ($17,868 x 25%) on your income taxes. (I say might because of the caveat below.) Quite literally, the IRS might pay for 25% of your interest cost.

Furthermore, your property taxes are deductible as well. In California your property taxes equal very roughly 1.25% of the purchase price, depending on where the property is located. In this case, your property taxes would run $6,250 per year. Your deduction might save you an additional $1,563 per year, courtesy of the IRS. Isn’t it nice for the IRS to be giving you money for a change?

If you are making such a good income that your tax bills are killing you and you have no other deductions, the US tax code is written in such a way as to encourage you to buy a home.

What is not usually said, however, is that if you do not have a tax problem, the tax benefits are less meaningful to you. Also, you are entitled to take the standard deduction if you don’t itemize deductions when you file your income tax return. If, after buying your home, you itemize in order to take advantages of the tax deductibility of your home mortgage interest and property tax deductions, you lose the standard deduction, so the tax benefits estimated with this example would be overstated.

If you want good information here, you’ll need to examine your specific situation and do a more in-depth analysis. In order to be sure what your homeownership tax benefits will be, you absolutely must consult your tax advisor, as your situation is unique.

Appreciation

Prior to originating mortgages, I was an appraiser for 17 years. When I hear folks tell me that real estate always goes up in value, I have to chuckle. Of course, I hear that less these days than I used to. From an historical perspective, values in our area (The San Francisco Bay Area) declined from about 1982 through 1985, and declined again from 1989 through 1994 or so. From 2008 through 2010 home values slid quite dramatically, but began recovering in 2012.

Even so, over time real estate has certainly risen in value, and has done so pretty reliably. If you buy a home, the chances are very good that given enough time, the value of your home will rise, and you will make money on the property. There are stories, of course, of folks making hundreds of thousands of dollars on their homes in a very short period of time. Don’t count on it. Buy a home because you want to own your own home. If you hold it long enough, the appreciation is a bonus.

Leverage

Focusing on appreciation, however, often makes us miss the real magic in owning your own home. If your property’s value does rise, you will benefit from the principle of leverage. What this means is that while the entire property is appreciating at a certain rate, only a small portion of the purchase price was your cash to begin with. The bulk of the price is usually fronted by a lender in the form of a mortgage. If the property is appreciating at, say, 3% per year on average, you are earning 3% on the money you invested. But since the entire property is appreciating, you are also earning 3% on the money the bank invested.

A simple illustration follows that might make this clear. In the example below we assume you have a choice of investing $107,000 into the down payment plus closing costs on a $500,000 home, or you can invest it safely in the bank.

In this example, you have the option to invest your down payment of $107,000 at 3% somewhere safe—a respectable rate of return. After 7 years you now have $131,597, for a 3.000% yield, or rate of return.

If, on the other hand, you invest it in a $500,000 home with typical bank financing, you are earning 3% on your money plus 3% on the lender’s money. At the end of seven years, you will have $214,937, compared to $131,597 if you simply put the money in the bank.

A $107,000 investment without leverage earning 3% per year grows to $131,597 after seven years. With leverage, the same investment grows to $214,937!

Because compounding makes it even better, the net result is an annual return of over 10% on your original investment of $107,000, an impressive annual yield.

This example is simplified to make the concept easy to see. We are ignoring the payments you’ll be making on the mortgage, the payoff of your mortgage principal, the rent you will not be paying as a result of owning your own home, and the costs of the sale of the home. But you can see that leverage is a very powerful tool, and one of the reasons that folks buy real estate.

However, the flip side of leverage is risk. The lender is guaranteed their rate of return; you are not. As millions of families learned in 2008, if your property declines in value instead of appreciating, your equity can be wiped out in a very short time, and you may even owe the bank more than your home is worth. For this reason, it is wise to think of real estate as a long-term investment. It took some time, but after the crash of 2008, real estate came roaring back by 2012.

Lifetime Housing Costs

You’re going to live somewhere, and you’ll have to pay for it. The conundrum for most first-time homebuyers is that renting almost always costs less to get in and less each month. But if we look closer, how accurate is that perception?

Is buying a home less or more expensive than renting? With both rents and home prices going up faster than they have in years, this is becoming a very interesting question.

For years real estate agents have used a common analysis that accounts for the tax advantages of home ownership to show that indeed, owning a home is as cheap, or nearly as cheap, as renting the same home. I’ve built a similar analysis and used it a number of times myself.

Because I work with a lot of Silicon Valley engineers, however, I always like to look deeper. (Because my clients do, and I need to keep up with them.) Consequently, I now look at a different way of answering the question posed by this chapter.

What is the lifetime impact of home ownership on your finances?

Any good Silicon Valley engineer considering buying a home would tell you that you have to look at long-term financial impacts. (I know this, because they’ve told me.)

For one thing, you can’t just look at raw costs—we have to compare owning a home to the cost of renting. You can’t stay in your parents’ basement forever. Also, while rent invariably goes up, your monthly cost of homeownership is relatively stable. It goes up, but at a slower pace. Even with the relatively benign inflation we’ve had over the last decade, a reasonable estimate for rent inflation over time might be 2% to 3% per year. Inflation measurements since 2021 have taught us that rent can go up much faster than that. But which costs will rise for a homeowner? Property taxes for sure and insurance almost certainly. But here’s the kicker: your rent will certainly rise, and your mortgage payment will not. In fact, eventually your mortgage payment will drop to zero when you pay off your loan. In the long view, a simple taxbased analysis significantly understates the financial benefits of home ownership.

It’s complicated, so let’s take a closer look at what happens when we take inflation into account.

If you continue to rent, your housing costs will rise throughout your lifetime. Even with a relatively benign inflation rate of 3%, you will be spending almost three times as much on your annual housing expense after 30 years than you do today.

If you buy a home, your housing costs still rise because taxes and insurance costs rise, but since your mortgage payment stays the same the total monthly housing cost rises much more slowly. And look what happens by year 30! In fact, in year 31 the principal and interest payment drops to zero—you only have to pay taxes and insurance.

Going back to the analysis above, you’ll see that over 30 years the cumulative cost of renting is estimated to be $1,144,665, while the cumulative cost of owning a home is estimated at $889,018. And then the annual savings skyrocket.

The most significant benefit can best be seen graphically.