Where To Live

We have just run through the parameters for determining how much home you can afford, how to come up with the necessary closing costs, and how to best finance the balance of the purchase price through a mortgage loan.  We are not quite through with our analysis.  Selecting the community in which you will purchase your new home includes many tangible and intangible factors.

You may desire, for example, to move back to the community in which you were raised.  In such a case, the factors I am going to talk about now are of secondary importance.  Take some advice from my wife (and you husbands who don't-watch out), live where you want to live and where you want to raise your family.  This is of primary importance.

But for many other homeowners (perhaps a majority) one community appears to be as good as the next.  For example, I live in the Greater Cleveland, Ohio area.  I may have a preference to live on the West Side of Cleveland, but beyond that general preference, Rocky River seems as good a place to live as Bay Village as does Avon Lake.  Now we want to sit down and give our decision some more thought.  There may be such an after-tax cost difference between living in these communities that it could effect the value of the home you are able to purchase.

Example: You and your spouse have isolated two suburban communities where you would like to purchase your new home. One, Oldtown, is where you currently live and the other, Newtown, is nearby.  The school systems in both of these communities are very good and historic student testing data (which you have obtained through the community's school district) are virtually identical.  Having moved beyond the schooling issue, you and your spouse now start exploring other elements in your decision to stay in your current community or move to Newtown.   On closer examination, you discover some huge differences.

Newtown is geographically larger than Oldtown and supports more business activity than does Oldtown.  Because of this business activity, you realize (after making a call to the County Recorder's office) that the property tax rate in Newtown is significantly less than in Oldtown. You realize that on a $150,000 home, you would pay $1,000 more in property tax in Oldtown than you would on a comparably priced house in Newtown.  Even though real estate property taxes are an Itemized Deduction on the federal income tax return (see page 24), the value of the tax deduction won't come close to making you whole on this out-of-pocket cost differential (for example, for the extra $1,000 cost you save $280 in tax payable if you are a 28% marginal rate taxpayer).

Also, on closer examination, you and your spouse discover another startling fact relating to your local income tax liability.  Like most of us, you are currently paying a municipal income tax liability in the town in which you work and an additional income tax liability to the town in which you live, Oldtown.  You have long known that in computing your Oldtown income tax liability you are allowed a 50% credit setoff for the income tax you pay to the municipality in which you work.  However, when you examine the municipal income tax structure in Newtown, you discover that Newtown residents are given a 100% credit in computing Newtown income tax liability for local income taxes paid to the municipality in which the resident works.  This difference provides you with another $500 a year savings in the net local income taxes you pay.

Anything else?  How about differences in sewer assessments and water costs.  Again, you and your spouse are surprised to learn that Newtown has its own water facility and that your total water and sewer costs in Newtown, for the amount of water use you anticipate for your family, saves you another $400 per year of out-of-pocket expense.  This last category of water and sewer expense savings is relatively more valuable than the property tax and local income differential.  The water and sewer expense is not deductible as an Itemized Deduction on the federal return whereas property taxes and local income taxes are.

After examining all of these differences, you and your spouse discover an amazing thing.  You realize that you could support the down payment and mortgage debt service on a $150,000 house in Oldtown but that you could purchase a $180,000 house in Newtown at the same out-of-pocket, after-tax monthly expense.

Note that in the Example, you have immediately increased the investment value of your home by $30,000 at the same monthly cost.  Such an occurrence might be worth you and your spouse spending a few hours thinking about these differences before you purchase your new home. This is a hugely beneficial exercise and could significantly change the inherent value of your home ownership.