I previously wrote an article titled “Don’t Buy a Home in Your 20’s” in order to mathematically dispel common myths about home ownership. This article will provide a few wonderful reasons to buy a home in response!
I will preface this entire article with the fact that I am EXTREMELY pro owning a home. Studies have shown that owning a home is one of the key drivers behind financial prosperity and building wealth.
However, many individuals go crazy, and they buy properties way beyond their financial means.
In order to properly justify owning a home, there needs to be a common framework for us to work from. These are not reasons to buy a home.
Follow these simple ground rules, and you will never regret buying a home!
NEVER buy a home that you could not afford on a 15-year fixed rate mortgage. I wrote an entire article about the difference between fixed and variable interest rate mortgages.
The difference sounds self-explanatory, but mortgage interest rate terms can be a lot more complicated than they seem.
A fixed-rate mortgage means that the interest rate will never change over the course of your mortgage loan.
For example, if you acquire a 15-year mortgage with a 5% fixed rate, you will pay a 5% interest no matter what happens regarding the general macroeconomic environment.
The exact opposite is true with a variable rate mortgage (sometimes called an ARM, adjustable-rate-mortgage). Your mortgage rate will be subject to change.
A good rule of thumb for personal homeowners is to always use a fixed-rate mortgage. A fixed-rate mortgage will carry a higher interest rate because there is more risk passed off to the lender, specifically interest-rate risk.
If you can’t afford your monthly payment with this higher interest rate, you are not in a good financial position for home ownership.
You can use a 15-year or 30-year time period. If you choose the 30-year mortgage, make sure you would still be able to make the monthly payment if you had selected the 15-year option.
Please do not buy a “starter home” if you have no intention of living there for at least 5+ years.
The transaction costs associated with real estate are ludicrous. Continuously moving around will steal any gains you may receive in price appreciation.
Nerd Wallet wrote a great article called “What It Really Costs to Buy a Home”. The following paragraphs were pulled from that article discussing closing costs.
Closing costs are lender and third-party fees paid at the close of a real estate transaction.
For a $300,000 home, you can expect to pay $6,000 to $15,000 in closing costs. These costs can include one-time fees like the following:
- Appraisal fee: the professional estimate of the home’s value.
- Survey fee: the cost for verifying a home’s definitive property lines.
- Wire transfer fee: the charge to wire funds to purchase the home.
- Underwriting and origination fees: the charge associated with evaluating, verifying and processing the loan application. These can be negotiated.
- Document prep fee: the cost associated with prepping your loan documents for processing. Not a required fee, and can often be negotiated or eliminated.
- Credit report fee: the charge for pulling your credit history and scores.
- Title insurance: a policy that protects you in case the seller doesn’t have full deed and authority to the property.
- Recording fees: government fees for entering new property records.
Agent commissions are typically 6%, split 50-50 between the buyer’s agent and seller’s agent.
Buyers don’t need to concern themselves with commissions, since they come out of the seller’s funds.
Commissions are negotiable, so as a seller, it’s always worth asking for a lower commission before signing a listing agreement.
For a $300,000 home, agent commissions will cost the seller about $18,000.
PMI or Private Mortgage Insurance is incurred whenever a buyer does not put 20% down. This insurance is EXTREMELY expensive (in percentage terms).
Banks and lenders use it to protect themselves from risky borrowers. It is not absolutely critical to always put 20% down, especially if you cannot afford to.
Just realize that PMI will be another expense associated with owning a home.
Reasons to Buy a Home
Finally, now that we have laid a framework, we can begin discussing some great reasons to buy a home!
One last tip though! If you are unsure whether to buy a home or rent, you should probably rent a little longer.
Nevertheless, here are some great reasons to buy a home!
In my young life I have experienced two completely different ends of the landlord spectrum. One landlord was a sweet lady who dropped everything to help with maintenance or lost keys.
The other landlord would take WEEKS to “fix” the simplest maintenance tasks. It only takes one really bad landlord to ruin your rental experience!
Landlords have the ability to survey their property and invade your personal space. It is their real estate at the end of the day, and what they say usually goes.
There are some really funny landlord horror stories on Reddit. The stories range from bugs and rats to landlords walking into the bathroom unannounced.
Consistent Mortgage Payment
Apartment Therapy noted, “As a tenant, expect the rent to increase with inflation, about three percent per year,” says Martin Eiden, a real estate agent with Compass in New York City.
That number sound familiar? Yes, that’s why cost of living adjustments are also on average around three percent.
Landlords aren’t allowed to hike your rent whenever they feel like it. Legally, they have to wait until your lease expires.
If you signed a one-year lease, then they have to wait a full year before asking for more money. Same goes for a two-year lease (and so on).
If you’re renting month-to-month, a landlord is technically allowed to increase the rent at the end of each month!
This is the exact opposite when you buy a home! Say you use a 30-year fixed-rate mortgage.
Your mortgage payment will be the exact same for the next 30 years! This takes away all the risk of rising payments that occur when renting, and it helps for budgeting.
Capital Gains Tax Break
Investopedia notes, “when you sell your home, the capital gains on the sale are exempt from capital gains tax.
Based on the Taxpayer Relief Act of 1997, if you are single, you will pay no capital gains tax on the first $250,000 you make when you sell your home.
Married couples enjoy a $500,000 exemption.”
The property needs to be considered your primary residence, so this will not work with investment properties.
Regardless, there is no form of capital gain tax breaks on stocks or bonds! Imagine you buy a house for $300,000 and sell it for $500,000.
Simply meet the primary residence requirements, and you will receive $200,000 of tax-free income!
The Taxpayer Relief Act of 1997 has been wonderful for homeowners. Before the act, sellers had to roll the full value of a home sale into another home within two years in order to avoid paying capital gains tax.
This is no longer the case, and the proceeds of the sale can be used in any way the seller sees fit.
I noted above that rental prices typically increase 2-3% annually, but home appreciation rates also increase approximately 2-3%.
Price appreciation is way more extreme on the coasts! It is not uncommon for areas of Los Angeles and San Francisco to see double digit annual price appreciation!
Renters have nothing to gain when prices are skyrocketing. Contrarily, home owners are greatly rewarded and capture the hot market gains!
Owners get to keep 100% of the appreciation profits, even though you didn’t put in 100% of their own money.
This is called leverage, and it makes real estate very attractive!
Mortgage Interest Deduction
Home mortgage interest is reported on Schedule A of the 1040 tax form. Mortgage interest paid on rental properties is also deductible, but this is reported on Schedule E. Home mortgage interest is quite often the single itemized deduction that allows many taxpayers to itemize.
Without this deduction, the remaining itemized deductions would not exceed the standard deduction. Interest from home equity loans qualifies as home mortgage interest.
Mortgage interest deductions are not nearly as prevalent due to the recently adopted tax cuts.
You can claim the standard deduction or itemized deductions to lower your taxable income. The standard deduction lowers your income by one fixed amount.
On the other hand, itemized deductions are made up of a list of eligible expenses (mortgage interest, charitable contributions, etc).
You claim whichever lowers your tax bill the most.
The recent tax cuts doubled the standard deduction, so more taxpayers claim the standard deduction.
Mortgage interest is no longer deductible once the standard deduction is claimed. However, high income earners will still itemize their miscellaneous deductions.
HELOC or Cash Out Refinance
Buying a home creates a liquidity issue. Liquidity describes the degree to which an asset can be quickly bought or sold in the market at a price reflecting its intrinsic value.
In other words: the ease of converting it to cash. Real estate is a non-liquid asset.
In the event you need access to the money within the property, you can get access TAX FREE! You will have to do a cash out refinance or obtain a HELOC.
HELOC stands for Home Equity Line of Credit, and it is a secured debt instrument that uses your home as collateral.
It allows homeowners to borrow money against the equity value they have built in their property. The interest paid on a HELOC loan is tax deductible.
This deductibility makes HELOC loans extremely popular because the effective interest rate was extremely low.
Zillow states, “A cash-out refinance is a refinancing of an existing mortgage loan, where the new mortgage loan is for a larger amount than the existing mortgage loan.
You get the difference between the two loans in cash. Homeowners do cash-out refinances so they can turn some of the equity they’ve built up in their home into cash.
Here’s an example to illustrate: Let’s say you own a $300,000 house and still owe $200,000 on the current mortgage.
This means you’ve built up $100,000 in equity. Now, let’s say you want some extra cash to the tune of $30,000. You could do a cash-out refinance to get this money.
If you did this, you’d get a new loan worth a total of $230,000.”
It’s Your Place to Call Home
This is, by far, the most important of all the reasons to buy a home. If you want the walls in your child’s nursery to be painted.
Go ahead and paint the room! Want to change the tile in the shower? Go ahead and do it!
Additionally, your home is a place to raise a family and create memories. I loved my childhood home, and I can’t imagine my life without it.
Buying a home isn’t always about the numbers. It’s about creating a better life for your family and laying a foundation with firm roots!
If you are unsure whether to buy a home or rent, you should probably rent a little longer!
Make sure you are in a strong financial position, and buying a home will be a tremendous blessing!
Owning a home is one of the key drivers behind financial prosperity and building wealth.
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