In my experience, owning your own home is a big part of the American dream. A house is often our biggest financial asset, as well as our biggest liability (via a mortgage). Deciding whether to buy a home is one of the most important financial decisions you can make, and it’s a decision I help a lot of clients work through. Let’s talk about some of the factors at play.
The Affordability Question
I recently spoke with loan officer, Myra Alvarez, on Minority Money Podcast about when to take the plunge on homeownership. She stated, “What it comes down to is affordability, whether you’re able to make that monthly mortgage payment.”
Nearly every budget website will tell you that you should be spending roughly 30 percent of your after-tax income on housing. That number comes from the government. The Department of Housing and Urban Development says “affordable” housing is anything less than 30 percent of your income. In reality, according to the Bureau of Labor Statistics, most Americans spend about 37 percent of their income on housing.
One factor that is more important than percentages that you should consider is whether you’re budgeting accurately for the costs associated with buying versus renting. Not only are there property taxes and maintenance costs to consider, you may also need to factor in neighborhood or housing association fees and more. We would discuss what these costs may be for your particular situation, and ensure you budget accordingly.
The Case for Renting
We’ve all heard the refrain that renting property is just “paying someone else’s mortgage.” But there are times when renting is a better financial decision. As a general rule, renting is considered better when rent is cheaper than a comparable mortgage.
Advocates of renting argue that if you take the money you save by not having a mortgage and invest it, your money will appreciate more than your home value.
If you live in an area where it’s cheaper to rent, try capitalizing on that fact by estimating what your mortgage would be for a similar property, and automatically transfer the difference between that amount and your current rent into an investment account.
There are a few flaws in this plan, however. Not only do you have to be disciplined enough to invest the difference each month, but in many U.S. cities, it’s cheaper to buy than rent.
It’s also important to remember that rent can increase. Even if you have a multi-year lease, you only know your monthly rent payments for the term of that contract. With a fixed-rate mortgage, you know what your monthly payment is going to be for the life of that loan.
The Case for Buying
If you talk to most financial advisors, the biggest selling point for homeownership is the equity involved. As you pay down your mortgage, you build equity. And for roughly two thirds of Americans, their home is their biggest asset. On the flipside, mortgages are also usually the household’s greatest liability.
There’s another important factor that comes with owning a home, and that is stability.
Here’s mortgage expert Jose Sahagun talking about what happened to his family when his parents bought their first home when he was 13:
“I had one home to come to after school. I had stability knowing that I wasn’t going to move to another apartment. Essentially for me, that was something that I wanted to give my children when I purchased a home.”
In addition to emotional stability, a home can also provide a certain degree of financial stability. For example, if you need cash in the future, a home equity line of credit tends to offer a lower interest rate than a credit card.
Increasing home values also has the potential to increase your net worth.
Don’t Time the Market
For some clients, they want to buy a home, but they don’t know if now is the right time. If you head to this Minority Money Podcast episode, one of the biggest takeaways you’ll hear is “don’t try to time the market.” (Sound familiar? It’s similar to what we say about stocks.) Here is what Alvarez had to say:
“It all comes down to affordability and understanding the programs available to first-time homebuyers…. I never say wait. I’ve had people wait, and I’ve seen prices go up $40,000. I’ve seen rates come down. [People are] either waiting for prices to come down or rates to come down. If you wait, you may be spending $100,000 more just waiting for rates to come down. If there’s a home that’s available in your price range, let’s make that offer.”
If you want to talk about affordability, the housing market in your area, or how you might take advantage of the programs available to first-time homebuyers, make an appointment and let’s talk.