For most people buying a home is the single largest purchase they will ever make. Also, it may be the most significant investment of their life. When you buy a home, not only are you choosing the roof over your head and the place in which you will bring up your family, you are also investing your nest egg. Admittedly it sounds a little scary, but buying real estate is also exciting and rewarding. Owning your home brings many benefits both financial and personal. Let's explore them together!
As a general rule, homes appreciate about five percent per year. Some years will be more, some may be less, and the percentage will vary from region to region and from neighborhood to neighborhood, Now five percent may not seem like that much when you consider that stocks may appreciate much more. However, they can also depreciate quickly and can be a risky investment. Let's keep it simple and say you buy a $200,000 house which you will finance. Let's suppose you put as much as twenty percent down – that would be an investment of $40,000. At an appreciation rate of 5% annually, a $200,000 house would increase in value $10,000 during the first year. That means you earned $10,000 with an investment of $40,000. Your annual "return on investment" would be a whopping twenty-five percent!
Of course, you are making mortgage payments, paying property tax and insurance. Now, this is the part I love, since the interest on your mortgage and your property taxes are both tax deductible, the government is essentially subsidizing your home purchase in the form of a reduction in your tax liability!
On a loan of $160,000 at 4.5%, during the first complete year (2015) you would pay $11,846.45 in interest. If your first payment is January 1st, your taxable income would be almost $12,000 less due to the IRS interest rate deduction allowed for ownership of property.
Property taxes are deductible, too. Whatever property taxes you pay in a given year may also be deducted from your gross income, lowering your tax obligation. Good deal!
When you rent a place to live, you can almost certainly expect your rent to increase each year – or even more often. With a fixed rate mortgage on your home, you have the same monthly payment amount for thirty years. Even if you get an adjustable rate mortgage, your payment will stay within a certain range for the entire life of the mortgage.
Imagine how much rent might be ten, fifteen, or even thirty years from now? If you pay rent all of that money goes directly into your landlords' bank account. Talk to any renter in the Metro and they will tell you that their landlords are loving it! Given current market conditions, from strictly an economic standpoint buying is the better choice.
Some people are just not so good at saving money. If they become homeowners, their house is an automatic savings account. You accumulate savings in two ways. Every month, a portion of your payment goes toward the principal. Admittedly, in the early years of the mortgage, this is not much. Over time, however, it does accelerate.
Remember the 5% value increase mentioned earlier? Though it will vary from year to year, and in some years stagnate or even depreciate, over time, historically owning a home is still a very wise financial investments.
When you rent, you are normally limited to what you can do to improve your home. You have to get permission to make certain types of improvements. Nor does it make sense to spend hundreds of dollars painting, putting in carpet, tile or window coverings when the main person who benefits is the property owner. Since your landlord wants to keep his expenses to a minimum unless it is absolutely necessary he or she will probably not be spending much to improve your living space.
When you own a home you can improve your living space functionally and aesthetically reaping all the benefits. Not only do you get to live in an environment you have created for your own personal taste and enjoyment, but those improvements made to your property will increase it's value when it comes time to sell.
If you move to a condominium from an apartment, you are likely to find you have much living area and amenities like larger rooms, well-planned use of space, your own laundry and storage area. Apartment complexes are more interested in creating the maximum number of income-producing units than they are in creating well planned and aesthetically appealing living space for each of the tenants. If you are moving to a home for the first time you can plant that garden you always wanted to. You can build a deck, put up a gazebo, plant some flowers! You will be thrilled with the additional storage space in closets and kitchen cabinets. Maybe you can set up a home office or craft room in your basement. Paint your kitchen a sunny yellow or your bedroom a soft shade of gray.
In the Twin Cities Metro, rents are high and expected to keep rising. Interest rates for mortgages are still at historic lows while lenders are easing criteria for buyers. Home values are still on the rise.
The logistics of buying a home can be complicated for most of us. There is a lot of paperwork and steps we take before we arrive at the closing table and are given the keys to our new kingdom. What many buyers are not aware of is the battle between ... Read More