Buying a home is one of the best long term investments you can make, if certain criteria are present.
By Daniel at 22 December, 2009, 3:11 pm
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1) If renting a home/apt is nearly the same amount as your mortage (PITI) would be purchasing a comparable living space…
2) If you plan on living in the home for longer than 5-7 years…..
3) You understand that the home is not going to appreciate faster than 3-4 percent per year on average….
4) You don’t use it as an ATM, to grab easy cash on an over extended line of credit or rediculous refi to buy unnecessary items….
If these criteria are met, then buying a home can be a great idea and long term plan to financial security. Why, you may ask?
If you’re paying approximately the same amount on your total home loan payment, principle, interest, taxes and insurance, you’re paying for a piece of property that you own, with the amount owed decreasing over time, with each payment the amount you owe on the property decreasing at an advancing rate. It’s an expense you’d have anyways, if you rent, but this way you’re paying for your own property, rather than your landlord’s future retirement. (Not to mention the tax deduction)
If you spend 10-20 years in your property, your payment will stay nearly constant (with the exception of Taxes and insurance adjusting periodically), while rents will continue to rise over the long term, which will eventually cost you more in the future than your current home payment.
If you eventually pay off your home loan, your only payment will be taxes and insurance (and of cousre, some maintanence), while the renter is now paying 3-4 times the rent they were paying at the beginning of this equation. An example:
My parents bought their home 30 years ago, with an initial payment of $220 a month, and now have a very nice home with no mortgage payment, giving them flexibility of what they wish to do with their disposable income. Their home’s value was $17,500 when they purchased it, and is currently worth (after a 20% fall in the market value here) about $250,000.
My mother-in-law didn’t purchase and keep a home for the last 30 years, and instead has paid rent that began at $185 a month 30 years ago, to $950 a month currently, with no end in sight. Rent for next year will be $1025 for her, as the landlord is increasing her rent, and there is no way for her to find a comparable property to rent for less, as she’d have to downsize quite a bit. Her equity that she has in her life right now? Zero. All she owns is her TV, clothes, and other personal belongings.
Not that it’s a bad thing or situation - my mother in law is a wonderful person. Her side of the family simply didn’t believe that buying a home was a smart decision “Because renting was cheaper.” 30 years later, each and every adult member of that side of the family realizes that it might have been a mistake at this point in life.
We realize now, of course, that values cannot jump 20%-30% a year and not have a correction, just as the stock market cannot have 30% increases annually without a correction. But once values have come down to reason, once rents and mortage payments come back in line (They already have in our area, not so in other areas yet), then purchasing a home for long term ownership is a great way to begin your way to financial stability in the future for yourself and yoru family.
If you plan on buying a home, then selling in 2-3 years, you’ll lost out as there is about 3% in buying costs normally (plus your down payment), and nearly 10% in selling costs (depending on the state you live in), thus if you buy a home, live in it for 2-3 years, it appreciates 6-10%, but you have 10% in selling costs, and 3% in buying cots, you are behind in the equity equation.
For those who ignore this, enjoy the rental payments you’ll be making in 30 years, which will be 3 times higher than they are right now.
Renting can be the best option for many, many people - but stating that buying a home is a bad move across the board, you simply are ignoring some of the great benefits owning a home brings to you in the long run.
Have a very Merry Christmas everyone.
- CenterOfTheUniverse
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