Everything Related to Smart Home Buying, Personal Finance, Property Taxes, Commute, School: How To Buy Bigger, Better Home Which You Can Afford

Home is the largest purchase most Americans will ever make. And if you have enough money saved for Down Payment and have sufficient income to support Monthly Mortgage, then you should definitely think about buying a home. Many a times, renting is nothing but paying off Landlord’s mortgage. We have previously discussed Buy vs. Rent in detail in this article: IS HOME OWNERSHIP RIGHT FOR ME?

Mortgage Components

If you want to buy a home, you want a bargain because everybody loves bargains! We are going to discuss different ways of getting a Bigger, Better Home for the Budget you have set for yourself. Two factors that have a significant impact on your buying power are:

Monthly Mortgage Costs
Commute Costs, which includes Fuel and Vehicle Costs.

We will talk about Commute costs in Part II of this Blog. In this part, I want to focus on the Monthly Mortgage Costs. Your Monthly Mortgage payment typically consists of four components:

Bank Installment. This is the money paid towards Principal and Interest. Also, this is the only portion of your Monthly Mortgage Costs that goes towards building equity in your home.
Property Tax
Property Insurance
Private Mortgage Insurance (PMI). PMI is not needed if you make at least 20% down payment.

Together, Bank Installment and Property Tax typically make up more than 90% of your Monthly Mortgage Costs. While Bank Installment is directly proportional to the amount you borrow and the prevailing interest rate, Property Tax varies from town to town. In short, Property Tax is a component that you can leverage to minimize your monthly costs.

Impact of Property Taxes on Buying Power

Below graph shows the impact property tax has on your monthly mortgage costs. For a $600K home in New Jersey, you can pay as little as $2,770 or as high as $4,020 towards Bank Installment and Property Tax together.

As shown above, your Bank Installment is $2,270 in all situations, but the Property Tax component is $500/month in Low Tax Towns and as high as $1,750/month in High Tax Towns. Another way to look at it is that Property Tax makes up only 18% of your monthly payment in a Low Tax Town, while the figure jumps to 44% in a High Tax Town. And as you can imagine, your goal should be to minimize the amount you spend on Property Tax.

I want to further illustrate the impact of Property Tax on your buying power using the following graph. Notice what you can afford if you are paying $3,000 towards Bank Installment and Property Tax. You can buy a $448K home in a High Tax Town or a Bigger, Better home worth $649K in a Low Tax Town. That is a whopping $200K more. That is the additional wealth you will be building for yourself, if you pay less in Property Tax.

So, it is very clear that high Property Taxes affect your Buying Power and you should find homes where you pay as less in Property Taxes as possible. Often, people are misled to think that Higher Property Tax rate implies a better town and a better school system, but that is not true. In many cases, over paid public officials, inefficient spending of the tax payer’s dollars and lack of enough business activity in the town, leads to higher Property Tax rates. Check this article which describes why New Jersey has higher taxes. It compares one state to other, but the reasons are same as to why one town has higher tax rate compared to another. In New Jersey, towns such as Whippany, Mahwah, Basking Ridge, etc. have lower Property Taxes compared to several other towns.

How to Find Home in Good School District Having Lower Property Taxes

So, now we know two facts – 1) Paying less towards Property Tax can help you build more equity in your home, and 2) Even very good towns can have Low Taxes. This is all good, but how do we find these gems where your property taxes are low and the schools are great? When I did my home search, I spent hundreds of hours on doing this extensive research and analysis. I first shortlisted the towns within my Commute range, then I filtered out any towns that had high tax rates. Finally, I filtered out towns that did not have a good school system. Ultimately, I was left with a short list of towns that were not too far from my work location or my spouse’s work location, had low tax rates and had a great school system. I consider all of this to be the “Step 1” of home search. At this point, I moved onto “Step 2” of home search which was to look at properties in these towns; followed by “Step 3” where I conducted further due diligence about the homes that liked. The unfortunate part of all this is that there was no home search engine or tool that takes care of all 3 steps involved in home search. That is when I and a friend realized the need for an end-to-end home search engine and we built ThinkHome, an Intelligent Home Search Engine.

At ThinkHome.com, one search covers Commute, School Ratings and Budget (Down Payment and Monthly Mortgage). Further, we assign ‘ThinkHome Score’ to each home where higher score implies lower spending on Property Tax and more towards creating wealth for you by building Equity in your home.

Case Study

I searched for homes on ThinkHome.com with the following parameters: Work location as Mahwah, NJ; Minimum GreatSchools Rating of 7 or more; $50K available towards Down Payment and $4,000 towards Monthly Mortgage. See couple of results below (please note how ThinkHome is using PMI to your benefit). Both homes are in good school districts and both are 22 minutes from the specified work location, but I can buy a $600K home in Wyckoff (ThinkHome Score 129) in my budget while I can buy only $500K home in Wayne (ThinkHome Score 107). This is because the home in Wayne has much higher Property Tax compared to the home in Wyckoff.

Ultimately, when more of your monthly payment goes towards Property Tax, you are left with less dollars to spend on Bank Installment and that in turn brings down your affordability. That is where ThinkHome Score comes into the picture. It allows you to find those gems, those homes that give you better bang for the buck. It allows you to build more Equity in your home, your Future!