On the fence about buying a house? Read this to help you decide.
There was a time when owning a home meant you had "arrived." While the allure of homeownership may not be what it once was, there are still some good reasons to buy. Here, we'll cover those reasons and how to get over any fears that may be holding you back.
1. Interest rates
Let's first cover the most obvious reason to buy a home: Mortgage interest rates are lower than most of us have ever experienced. If you can manage to snag a house that is reasonably priced, you will save thousands of dollars over the life of the loan, simply because of low rates.
A funny thing happens to home prices when interest rates drop, though. Like a counterweight, home prices rise. That's because sellers assume that buyers will pay more for their property when rates are low. If the low rate inspires you to go house hunting, take your time to find a fairly-priced property. You are only money ahead if you don't overpay.
Homeowners paying a mortgage have two tax-time options: take the standard deduction or itemize their expenses. Itemizing allows you to deduct mortgage interest. Buying now means that you get to compare which filing method saves you the most money.
During the period in which I decided that we were better off renting, one thing that bugged me was that we were paying our landlord's mortgage payment and property taxes while he got to deduct those expenses on his annual tax return. We were living in the San Diego area and rents were high. Our landlord was smart. In addition to the monthly overage we paid him (the amount of rent we paid that exceeded his mortgage payment), we covered everything but major repairs. The house was fairly new and there were never any repairs to make, so he was definitely money ahead.
The interest rates may be low right now, and the size of your interest deduction may not be impressive enough to blow your hair back, but it's yours. You pay it and you get credit for it. There's a certain satisfaction in knowing that.
Most homes appreciate over time, without you doing anything at all. You go about your life, make regular mortgage payments, and the value of your house slowly creeps upward. Of course, appreciation is not guaranteed. It's possible to buy a home, only to find out years later that it was built on a landfill, or you settled in a once-booming town that suddenly loses its largest employer and property values plummet. Still, if you're careful about where you buy and how much you pay, appreciation can add to your net worth.
Buying a home offers the opportunity to build equity. Equity is money you can borrow against if you have an emergency. Let's say your company downsizes and you are temporarily out of a job. In the midst of job hunting, the septic tank on your property begins to leak like a sieve. As anyone who has lived on a property with a septic system will tell you, it's pretty tough to do without a new one when the old one goes belly up. Here you are, already concerned about finances and unsure of when you will begin a new job. A home equity loan can be a lifesaver in a case like this. If you have enough equity in your home, the lender is likely to overlook the fact that you are currently unemployed (as long as they believe you can make the monthly payment). In addition, the interest rate is likely to be low because your home is used as collateral.
The downside of a home equity loan is that the bank can take possession of your home, sell it, and recoup their losses if you miss a payment. Before signing on for a loan that uses something as important as your home as collateral, make sure you understand the terms and can easily afford to make every payment.
Chances are, you will never need a home equity loan, but it's nice to know it's there if you do.
Today was the first time I've ever counted how many times my husband and I have moved throughout our marriage. The number is 22. Each move had purpose but was unsettling. My favorite thing about being a homeowner is not financial. It's having a sense of where we belong. It's walking in after a trip and seeing paint colors we chose, on the walls of a home that belongs to us.
That stability extends to knowing how much our mortgage payment will be each month. Renting means understanding that the landlord can raise your rent payment each time a new rental agreement is signed.
Our home is an investment. We know that with each mortgage payment, our share of equity in the property rises. We have also chosen to pay a little extra toward the mortgage each month to speed up the process. One other thing we do that may work for you: While we make sure to max out our 401(k) for retirement, we also invest enough money in another account, earmarked to pay off whatever is left of the mortgage before we hit retirement. Because we aren't scheduled to owe much by then, this is not a huge account. Still, it's nice knowing it's there. If we were still renting, we would always have to budget for a monthly house payment. By paying off the mortgage, we can focus on taxes, insurance, and maintenance only.
And the truth is, one of us will likely outlive the other. If the final spouse standing ever needs long-term care, the home can be sold to help pay a portion.
Fighting the boogeyman
Every adult in this country has lived through a recession, and most of us have lived through two difficult periods of economic upheaval. Recessions shake us. They remind us that things can go south. Suddenly, the idea of being stuck in a city where we may not be able to find a job and saddled with a mortgage we may not be able to afford becomes the boogeyman -- the thing that scares us off.
I've been through this myself. After owning several homes and losing our shirts on one of them, the idea of buying was too frightening to contemplate. We once became renters for eight years, just to avoid the "what-ifs." Through that phase now, I am armed with a better sense of how to prepare for the what-ifs.
The smart borrower learns from their mistakes. The really smart borrower learns from the mistakes of others. Feel free to learn from my mistakes. Here's how I've learned to feel comfortable living with a mortgage:
- Put at least 20% down. We save money by not paying private mortgage insurance (PMI), and have instant equity in the home.
- Buy in the right area. You can't predict what will happen to your neighborhood, but you can make a fair guess regarding property values. For example, we bought our current home because it's in a top-rated school district.
- Fill your emergency fund. The general rule of thumb is to keep enough in an emergency fund to cover three to six months' worth of bills. I found that I needed a bigger cushion to feel comfortable buying another home. The right financial buffer for you may be larger or smaller.
- Spring for every inspection necessary. Do not buy a home without having it thoroughly inspected first. If there is any feature of the home that the inspector does not cover (like a septic system, hot tub, or pool), call in a specialist to ensure they are in working condition.
Some people are more comfortable taking risks than others, but let's face it, everything we do in life comes with its own share of what-ifs. Buying a home is no different. The best you can do is prepare your finances before you buy. Or, in this case, look before you leap.
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