My goals are simple -- to ensure that you're happy with the home you buy, that you get the best deal you can, and that owning the home helps you to accomplish your financial goals. Most people should eventually buy homes, but not everyone and not at every point in their lives. To decide whether now's the time for you to buy a house, consider the advantages of buying and whether they apply to you.
Owning should be less expensive than renting
Here's a guideline that may change the way you view your seemingly cheap monthly rent. In order for you to see how expensive a home you could afford to buy while having the same approximate monthly cost as your current rent, simply do the following calculation:
Take your monthly rent, multiply by 200 = purchase price of home
Example: $ 750 x 200 = $150,000
So, in the preceding example, if you were paying rent of $750 per month, you would pay approximately the same amount per month to own a $150,000 home (factoring in tax savings). Now your monthly rent doesn't sound quite so cheap compared to the cost of buying a home, does it?
Even more important than the cost today of buying versus renting, what about the cost in the future? As a renter, your rent is fully exposed to increases in the cost of living, also known as inflation. A reasonable expectation for annual increases in your rent is 4 percent per year.
Renting and Inflation
When you're in your 20s or 30s, you may not now be thinking or caring about your golden years, but look what will happen to your rent over the decades ahead with just modest inflation! Then remember that paying $750 rent per month now is the equivalent of buying a home for $150,000. Well, in 40 years with 4 percent inflation per year, your $750 per month rent will balloon to $3,600 per month. That's like buying a house for $720,000!
Although the cost of purchasing a home generally increases over the years, once you purchase a particular home, the bulk of your housing costs are not exposed to inflation -- if you use a fixed-rate mortgage to finance the purchase. Therefore, the comparatively smaller property taxes, insurance, and maintenance expenses are the only housing costs you will have that will increase over time with inflation.
Even if you must stretch a little to buy a home today, in the decades ahead, you should be glad that you did. The financial danger with renting long term is that all of your housing costs (rent) will increase with inflation over time. We're not saying that everyone should buy because of inflation, but we are suggesting that, if you're not going to buy, you should be careful to plan your finances accordingly.
Wealth and Equity
Over the many years that you are likely to own it, your home should become an important part of your financial net worth -- that is, the difference between your assets (financial things of value that you own such as bank accounts, retirement accounts, stocks, bonds, mutual funds, and so on) and your liabilities (debts). Why? Because homes generally increase in value over the decades while you're paying down your loan (mortgage debt) used to buy the home.
Even if you're one of those rare people who owns a home but doesn't see much appreciation (increase in the home's value) over the decades of your adult ownership, you will benefit from the monthly forced savings that results from paying down the remaining balance due on your mortgage. Retirees will tell you that one financial joy of retirement is owning a home free and clear of a mortgage.
All that home equity (which is the difference between the market value of a home and the outstanding loan on the home) can help your personal and financial situation in a number of ways. If, like most people, you hope to someday retire, but (also like most people) saving doesn't come easily, your home's equity can help supplement your other sources of retirement income.
Tapping into equity
How can you tap into your home's equity?
Some people choose to trade down -- that is, to move to a less costly home in retirement. Sell your home for $250,000, replace it with one costing $150,000, and you've freed up $100,000. Subject to certain requirements, you can sell your home and realize up to $250,000 in tax-free profits if you're single; $500,000 if married.
Another way to tap your home's equity is through borrowing. Your home's equity may be an easily tapped and low-cost source of cash (the interest you pay is generally tax-deductible).
Some retirees also consider what's called a reverse mortgage. Under this arrangement, the lender sends you a monthly check you can spend however you want. Meanwhile, a debt balance (that will be paid off when the property is finally sold) is built up against the property.
Balancing your investment
In your zest and enthusiasm to buy a place and make it your own, be careful of two things.
Don't make the place too weird. You'll probably want or need to sell your home someday, and the more outrageous you've made it, the fewer the buyers it will appeal to -- and the lower the price it will likely fetch. If you do make improvements, focus on those that add value: for example, skylights, a deck addition for outdoor living area, updated kitchens and bathrooms, and so on.
Beware of running yourself into financial ruin. Changing, improving, remodeling, or whatever you want to call it costs money. We know many homebuyers who have neglected other important financial goals (such as saving for retirement and gaining the tax benefits of doing so) in order to endlessly renovate their homes. Others have racked up significant debts that hang like financial weights over their heads.
No More Landlords
A final (and not inconsequential) benefit of owning your own home is that you don't have to subject yourself to the whims of a landlord. Much is made among real estate investors of the challenges of finding good tenants. When you're a tenant, perhaps you've already discovered that finding a good landlord isn't easy, either.
The fundamental problem with some landlords is that they are slow to fix problems and make improvements. The best (and smartest) landlords realize that being responsive and keeping the building ship-shape help attract and keep good tenants and maximize rents and profits. But to some landlords maximizing profits means being stingy with repairs and improvements.
When you own your home, the good news is that you're generally in control -- you can get your stopped-up toilet fixed or your walls painted whenever and however you like. No more hassling with unresponsive, obnoxious landlords. The bad news is that you're responsible for paying for and ensuring completion of the work. Even if you hire someone else to do it, you still must find competent contractors and oversee their work, neither of which is an easy responsibility.
Another risk of renting is that landlords may decide to
sell the building and put you out on the street. You should ask your prospective
landlords whether they have plans to sell. Some landlords won't give you a
truthful answer, but the question is worth asking, if this issue is a concern to
Rachel services the Philadelphia Main Line area including: BALA
CYNWYD, BRYN MAWR, GLADWYNE, HAVERFORD,
MERION, NARBERTH, ROSEMONT, VILLANOVA, WAYNE
When looking to buy or sell, ask for Rachel:
your intelligent, experienced, knowledgeable
real estate specialist who cares about YOU.