Most people rent (instead of owning) because they're unsure if they will be living in their area very long. Or they just moved to the area, and want to get a "feel" for the market before they buy. For some, the idea of assuming the responsibility of a mortgage is a deterrent. Whatever the reason, STOP RENTING! Owning real estate is one of the most fabulous ways to build wealth!
The Power Of Leverage Can Give You Incredible Returns!
You magnify your purchase power with what is called leverage - the use of borrowed money to purchase an asset that is likely to appreciate, magnifying your profit. When you buy a home and take out a mortgage (as most people do), you are borrowing money from the bank. Therefore, when your home appreciates, you keep the profit on a home you haven't even paid for!
This example clearly illustrates the power of leverage: If you
were to pay all cash for a $150,000 home, and you sold it for $180,000, the $30,000 in profit represents a 20% return on your original investment. However, suppose you took out a mortgage (like most buyers), and put a 10% cash down payment on your home. You paid $150,000 for the home, and later sold it for $180,000, making $30,000 in profit. You made $30,000 on a $15,000 investment (your down payment)! That's a fabulous 200% return using the power of leverage! Why do you think people buy properties and rent them out? You pay the mortgage, while they use leverage to profit when the property appreciates.
Appreciate the word Appreciation!
The price you sell your home for, less the price you paid, is appreciation. Real estate normally appreciates at an average annual rate of 5%, providing you're not in a depressed market. Compared to the more speculative stock market, this represents a more reliable
return on investment. And when you add the power of leverage, you can make 5% per year off borrowed money!
Owning A Home Is The Ultimate Tax Shelter!
Consider the tax benefits that you are currently not enjoying by renting. As you're probably aware, the IRS does not allow you to write off your rent. When you make a mortgage payment, a portion of your monthly mortgage payment is interest expense on the loan, which is fully tax deductible! The good news is during the early years of repaying your mortgage, a large percent of your mortgage payment is interest (versus later in the loan, when you are paying down the home). Your tax deduction from writing off interest on your mortgage payments can be great! Furthermore, you can write off your annual property taxes and a portion of your closing costs.
Tax Bill of 1997
Most importantly, thanks to a provision in the tax bill of 1997, when you sell your home, $250,000 of the profit from the sale of your home is tax free if you file a single tax return and $500,000 of the profit is tax free if you file jointly! In other words, you are most likely going to pocket all of the profit when you sell your home! Add leverage, price appreciation, and the fact that your profit (up to a certain amount) won't be taxed, and buying a home is simply one of the best investments you can make!
Let's Look Beyond The Finances: The Psychological Benefit Of Owning A Home
The last time you started hammering a nail in the wall to hang up a picture, you were probably wondering if your landlord would disapprove. With home ownership, you are in control! You don't have to get permission to bang in a nail. If you want to make improvements, like fixing up the bathroom or remodeling the kitchen, this a project that you can control and enjoy. Most importantly, owing a home is the American Dream! The pride of ownership dates back to the founding of this country.
I hope this informational report was informative. As your local real estate professional, I am constantly aware of "good deals" on the market, and can help you determine what type of house and location is "right" for you. You can call me at any time for advice, and please remember that you are under no obligation or pressure of any kind. I would very much like to help you.
If you don't own a home, you're missing out on one of the best tax shelters available, period!
The U.S. tax code heavily favors home ownership. First, you can write off the full amount of your annual mortgage interest payments. Unfortunately, in the early years of paying mortgage payments, you are paying mostly interest. The good news is you can write all of these interest payments off. These amounts can be quite substantial! In addition, you can write off your annual property taxes.
The 1997 Tax Bill
The largest advantage of home ownership is the generous capital gains tax exemption when you sell it. The 1997 tax bill allows you to keep up to $250,000 of the profit without paying any capital gains tax. So if you buy your home for $150,000, and in fifteen years you sell it for $400,000, you can keep all of the profit ($250,000). Joint returns allow you to keep up to $500,000 of the profit tax-free.
What other investment is this attractive?
If you buy stocks, you have to pay capital gains tax when you sell them. If you buy bonds, you have to pay taxes upon their maturity. If you invest in IRAs, you have to pay taxes on the funds when you begin drawing from the accounts. However, home ownership allows you to keep $500,000 in profit, tax free (if you are married) and $250,000 if you are single!
The road to wealth
Sarah and Sam bought their first home when they were 30 for $150,000. They put 10% down on the home loan. They sold it seven years later for $195,000. They rolled the profits (less selling expenses) into a new home, which they bought for $250,000. Fifteen years later, they sold the house for $450,000. Their initial $15,000 investment is now worth $245,000! In this case, they combined powerful capital gains exemptions with the power of leverage - they used the bank's money to finance their homes. This simple example illustrates how wealth can easily be created by taking advantage of the U.S. tax code.
Are you still renting? Every payment you make to your landlord is depriving you of your future wealth!
I hope this informational report was informative. As your local real estate professional, I am available to answer any questions you have about the tax benefits of home ownership. You can call me any time for advice, and please remember that you are under no obligation or pressure of any kind. I would very much like to help you.
So what's a buyer to do? For starters, you should:
Research and determine what you want beforehand - how many bedrooms, approximate square footage, preferred eighborhoods, and how much you can afford to spend.
Make sure your credit report is accurate. There would be nothing worse than finding the perfect house and missing your chance to make an offer because there's an error on your credit history that places you in an unfavorable light with a lender.
Get pre-qualified for a mortgage before you begin looking at homes. Not only will this give you an exact price range for your purchase, but pre-qualification will add muscle to your offer.
Stay in close contact with your agent and clearly express your needs. This is especially important if you're in a market where inventory is low. You'll want to be notified as soon as a home that fits your criteria goes on the market. A good agent in a tight market stays on top of the listings on a daily basis and calls you the minute a good match shows up, especially in communities where homes are listed and pending sale in the same week, or even same day.
Use the Internet to scout out new listings on the Local Listing Service.
Keep in mind that there's no such thing as the "perfect" home especially if you're in a market where prices have been consistently rising. Instead, set priorities. Determine what you're willing to sacrifice.
Bid competitively. Keep in mind you'll likely be competing against other offers. Now's not the time to play games and how low the seller will go.
Forget about making a contingent offer. When multiple offers are flying, a contingent offer - one that is based upon you selling your house first - will wind up in last place. Sell your house first, have your down payment in hand, and be ready to rent or live with family or friends temporarily.
Get a professional inspection before you buy the home and sign the final mortgage loan papers. Otherwise you'll be left in the dark about any hidden defects in the property.
Most importantly, if you're determined that now is the time to buy, don't be timid. You'll need to be ready to act on a moment's notice and present an attractive offer as soon as you see that close-to-perfect home that hits the market.
Finding a property that is priced at or below market value and navigating through the mechanics of the real estate transaction is not easy! If you have a tax question, or need legal advice, you seek a professional. When it comes to finding the right house for hundreds of thousands of dollars, and making sure the transaction goes smoothly, you need your real estate professional!
Best Part Is, It doesn't Cost You A Dime!
When you a buy a property through your real estate agent, she or he is taking care of you at no cost to you. The seller typically pays your agent, so you get representation for free! That's a bargain, considering all of the service your agent will provide for you:
Finding Your Home
Your real estate has access to the right resources and networks to find homes that are "undervalued". Of course, you can find homes on the Internet or through local ads . . . but houses that are placed on the market below market value often don't ever make it to the MLS, let alone the Internet! Real estate experts know that less than 15% of the homes sold in America are ever advertised in the newspaper or in a magazine. Your real estate agent is privy to these "steals." She or he is in constant contact with the other agents who have listings coming onto the market. Working through your agent, you can get "first crack" at these properties before they are advertised to the public.
In addition, your agent can find you the "right" home while you're at work and tending to your other responsibilities, and show them to you at YOUR leisure! What's your time worth? Your agent can save you plenty of time!
Making the "Right" Offer And Negotiating
A lot of thought and analysis needs to go into your "offer". Factors like comparable properties on the market, recently completed transactions, location and the seller's circumstances all play a part in the amount of the offer. Your real estate agent will help you present the most reasonable offer. In addition, your real estate agent is an accomplished negotiator who can make sure the deal moves smoothly to closing (making sure the deal doesn't fall apart is critical!)
Obtaining Financing
Most real estate agents work closely with one or several good lenders. Your real estate agent can help explain the myriad of loans (VA, FHA, Conventional, ARMs, etc) and set you up with a good mortgage lender. This person will help steer you through the application process and the paperwork maze. Most importantly, this person should help get the best loan for you. Take advantage of your real estate's team - which usually includes a good mortgage lender.
Due Diligence & Settlement
Due Diligence is the process of trying to discover potential problems in the house you are buying before you buy. These problems can range form structural or cosmetic (for example, termites or leaky roof) to problems with the title, taxes or homeowners association. Your agent has experience uncovering these problems, and can save you a lot of money and grief. Furthermore, your agent typically knows reputable structural and termite inspectors that are a part of her or his "team." These inspectors can help uncover any problems that may cost you money and grief later on. Also, your agent will make sure you bring everything you need (paperwork, the exact monies, etc.) to the settlement table. They're job is to make sure the settlement goes smoothly!
Building A New Home
Many new homebuyers erroneously believe that if they buy a home from a builder without going through a buyer's agent, they will save money. The fact is, most builders pay a commission, and if you do not use an agent, the builders simply keep that money for themselves as profit. The worst part is, in this case, you will forgo FREE representation!
Negotiating without representation can be a disaster! Most builders do not fall under state real estate commission laws, and therefore do not have to use approved commission purchase contract forms. Most likely, the builders had their own purchase contracts drafted in their own interest . . . NOT YOURS. Most real estate agents are familiar with these contracts, and can recommend inclusions are exclusions to save you trouble. Agents can also help negotiate important points like "final walkthroughs", contingencies, and closing dates. Best of all, real estate agents have experience negotiating, and may, for example, be able get the builder to do upgrades at no additional cost!
Be certain to work with a broker that can act as your advocate. Many states have a broker relationship known as a buyer's agent. Virginia does. Avoid working with agents that are neutral such as transaction brokers, dual agents or seller's agents and sub agents, as they do not represent you. Become familiar with the types of agency available to you in your area and ask your real estate professional to guide you.
We hope this informational report was informative. As your local real estate professionals, we are constantly aware of "good deals" on the market, and can help you determine what type of house and location is "right" for you. You can call us at any time for advice, and please remember that you are under no obligation or pressure of any kind. We would very much like to help you.
Use A Guide!
The home buying process is full of potential pitfalls. Most of those potential pitfalls result from making poor decisions, including: choosing the wrong type of home, the wrong lender, failing to get a thorough inspection and problems with the title. The last two potential problems can cost you a lot of money and grief!
Do not buy without a real estate agent! First, your agent will help navigate you through the entire home buying process and help you avert many of these mistakes. Secondly, the seller pays your real estate agent's fees. Buying a home through your agent costs you nothing! Now imagine if our other professionals, including accountants, attorneys and doctors, cost us nothing!
Below are the most common mistakes buyers make, which often costs them thousands of dollars and loads of grief:
1. Not Planning Before Purchasing.
Like buying a car, searching for a home can be impulsive and emotional. Don't let one aspect of the home (its appearance for instance) be the sole factor in your buying decision. Sit down with your real estate agent and map out a strategy. Answer the following questions before you begin searching: 1) Where do I want to live? Do I want to commute? What area has the highest price appreciation according to my agent? 2) How Much can I afford? The first thing you should do is have your real estate help get you pre-approved. That way, you'll save yourself a lot of time by not looking at homes you simply cannot afford. Also, how much do you have as a down payment? 3) What type of home do you want? Be brutally honest with yourself.
The point of this exercise is to make sure you make the best investment and live in the right area. Also, you don't want to be over-extended with your mortgage payments!
2. Not Identifying Opportunities.
Before you buy a home at or above market value, find out where the "deals" are. Your agent probably knows of a several sellers in your market that are selling due to "special circumstances". Perhaps once seller in the neighborhood you want to live is getting divorced. Maybe another one is being relocated by her or his company and needs to sell fast. How will you know if a seller in the neighborhood lost her job and is willing to sell for thousands below list? Work with your agent on this!
3. Not Finding The Right Lender
Getting the right type of loan for your situation is critical. There is myriad of lenders vying for your business. Many are online, many are local. The difference truly is the person you work during the lending process. Your real estate agent typically works with one or a handful of lenders she or he has good relationships with. A good lender will make sure you get the right loan at the right rate. Be careful!
4. Failing To Get A Good Title
Nothing can be more draining, both financially and emotionally, than buying a home with a "clouded" title. For example, you may buy a house and learn after the fact that the previous owner still owed a contractor $5,000 for the remaining payment on the basement remodeling. The contractor filed a lien on the property prior to the sale. That lien is now on your property! Your real estate agent will help make sure the title to the property is free and clear. Also, your agent will help you purchase title insurance.
5. Failing To Get A Good Inspector
Like any profession, there are good inspectors and those who tend to overlook a lot of problems. You want an inspector that will scrutinize every aspect of the house. Your real estate can recommend good inspectors. If you're afraid of a possible conflict of interest, look in the yellow pages and hire your own. Make sure you get several referrals from past clients. Most importantly, make sure you do not buy a house that has structural or other defects because the inspector overlooked them! This will cost you!
6. Wasting Your Time
All too often, buyers waste hours in front of their computer combing through online real estate sites. Problem is, these homes are usually not the best deals. Save your time. Spend it on things that are important to you . . . family, friends, work, etc. Your agent will notify you when the right homes become available.
7. Failing To Do A Final Walkthrough
This is can be a critical mistake. Before you close on your home, do not assume that all of the repairs you asked for have been done. Walk through the house before closing, and make sure the repairs have been done. Make sure nothing else has changed. Once you buy the home, any problems are yours!
I hope this informational report was informative. As your local real estate professional, I am available to answer any questions you have about purchasing your next home. You can call me at any time for advice, and please remember that you are under no obligation or pressure of any kind. I would very much like to help you.
5. What should I buy? A New Home, Resale, Single-Family, Condo or Town home? The Pros and Cons.There a number of things to consider when you're buying a home. First, where do you want to live? If you have a growing family, maybe you want to live in the suburbs? This can obviously affect your commute. Is this a neighborhood where you want to live? Also consider the investment value of where you want to live. Make sure the area has seen consistent price appreciation.
Then, there's the question of what type of home you want to buy. This will also depend on your lifestyle, but make sure you are buying the right type of home, in the right area, based on investment value. After all, buying a home should be an investment. This guide discusses the potential benefits and drawbacks of each particular type of home.
An old home versus a new home
It may appear that newer homes are better investments. After all, they're brand new . . . everything is sparkling. The layouts are consistent with today's styles. And the neighborhood amenities (for example, pool, recreation centers and shopping) make the neighborhood very convenient. Furthermore, you've probably heard that most new homes appreciate from the minute you buy the lot.
This is not always the case! From an investment standpoint, older resale homes can offer just as much, or even more, opportunity for price appreciation. First, older homes are usually closer to the city, so they are often in convenient areas. Secondly, many older homes actually have better quality construction than today's newer homes. On older homes you're likely to find slate roofs, copper gutters, chimney flashing and hardwood floors. Finally, older neighborhoods are established, which means, "what you see is usually what you get." You usually won't find a lot of new construction in your neighborhood that could affect the value of your home.
On the down side, older home may not have the coolest floor plans. The kitchens and bathrooms may be outdates in these homes. Finally, unlike newer homes that are usually maintenance-free, you may incur repair bills after buying older homes. Again, the newer homes have downsides too, including possible poor workmanship, poor location on the fringes of suburbia, unsettled neighborhoods and cookie-cutter appearances (lack of charm).
Your real estate professional will help you make the best decision. Both older and newer homes have advantages and disadvantages, but both can be excellent investments.
Should I buy a single-family home, condo or town home?
The answer to this question depends greatly on your lifestyle, but each type of home has different investment potential. If you have a growing family, you will avoid a condo. Likewise, if your family is small, you have few or no children, or your children are grown up, you may not need the space of single-family home. A condo may offer you more convenience.
An important consideration is the largest percentage of buyers end up buying a single-family homes. In other words, most families have children and a lot of "stuff" to store, so they want single-family homes. Therefore, single-family homes are often easiest to resell and have higher price appreciation potential. Town homes and condominiums also can be excellent investments. Just make sure you buy one in an area that is likely to see price appreciation. Your real estate agent can show you data of what types of homes recently sold in different areas, as well as what type of homes are seeing higher price appreciation. Remember, your home purchase should be an investment decision!
I hope this informational report was informative. As your local real estate professional, I am available to answer any questions you have about finding a home that fits your lifestyle and also has good investment potential. You can call me any time for advice, and please remember that you are under no obligation or pressure of any kind. I would very much like to help you.
Get your offer in before others arrive. The old adage that the "early bird gets the worm" applies here. Your agent is in constant contact with other agents who just got a listing, but haven't put the home in the MLS yet. Talk to your agent. Most know of one or two under priced properties at any given time. Otherwise, if you wait for the property to come onto the MLS before you submit your offer, other investors will be ready with their offers as well.
Consider "as is" homes. Occasionally in a hot market you can get a good deal out of sellers who have a problem property. Because the seller's don't want to fix the problem, they have to lower their price. Often, these homes sell for substantially less than the neighboring property, providing you with a rear opportunity to get in lower. Sometimes, they don't want to bother because they are elderly. Or they are forced into a quick sale - corporate relocation, divorce, need cash, etc.
Most buyers won't touch as is homes. They won't see beyond clutter or dirty carpets. Many times, there is nothing wrong with the property. The buyer's just don't see beyond the cosmetics. Use this to your advantage - look beyond cosmetic flaws and imagine the property after you clean it up.
Look For Fixer-Uppers
Usually, they are trashed and run down. A typical fixer upper may have heavily soiled and worn carpeting, broken windows, dirty walls, and broken appliances. May have cracked slab foundation, weathered and worn window frames, or some simply have poor paint.
See beyond the home's bedraggled appearance. Use some vision. Many of these fixer uppers can be made appealing with a minimal amount of cosmetic work. Others may require minimal structural repairs.
When you by a fixer upper, always calculate exactly how much it will cost to put the property back into shape.
Also, always low-ball fixer uppers. Sometimes you can get the property at discounts as much as 30% or more, depending on the owner's circumstances.
Where do you find them? Your agent knows.
Look at "out of favor" homes
Sometimes, houses are out of favor because of a particular style. For example, a bungalow in a neighborhood of colonials may sit. Nothing wrong with it. You can get these properties at a discount, and still will appreciate in price with the rest of the neighborhood.
FSBOs
When the market is sizzling hot, there tends to be more FSBOs. However, many buyers do not like to deal with FSBOs. As a buyer, when you're dealing directly with the owner of the property, there are problems from the outset. First, FSBOs hover over prospective buyers. Secondly, buyers don't want to confide in FSBOs. Thirdly, FSBOs get defensive quickly, because they are emotionally tied to the house. All of these factors make buyers steer clear of FSBOs. As a result, FSBOs tend to languish on the market, and eventually hire an agent. Then the property sells within days.
Use this to your advantage. Step in and buy the FSBO before it is listed with an agent. Low-ball.
Find Sellers who are highly motivated
Your agent is in constant contact with other agents, and knows the circumstances and motivations of a lot of sellers. They can find out if there are any owners who are under strong pressure to sell quickly. Use your agent's "inside" knowledge to your advantage. This is how you can find very good deals.
Look for REOs and foreclosures
People are always losing their properties to foreclosures. Sometimes it's because of a job loss, divorce, etc. These are most plentiful when the market is bad. Your agent can help navigate the risks and rewards of buying foreclosures. You can get foreclosures at greatly reduced prices to help sellers get out of the property and preserve their credit.
REOs are bank-owned properties. They are not easy to find, since most lending institutions do not want to advertise the fact that they had to take properties back. Your agent is often aware of these, and can help you locate them. You can find very good deals.
I hope this informational report was informative. As your local real estate professional, I am constantly aware of "good deals" on the market, and can help you determine what type of house and location is "right" for you. You can call me at any time for advice, and please remember that you are under no obligation or pressure of any kind. I would very much like to help you.
Before you are ready to make an offer on a home, you need to have your financing in order. Your agent will refer you to a lender who is usually part of her or his team. Your lender will help you get pre-qualified for your loan and will recommend the right type of loan based on your circumstances. Furthermore, your lender will make the entire loan process smooth by guiding you through the paperwork maze.
This information report was written to help you understand the basic differences between the types of available loans. This should help you determine the best type of loan for your circumstances. Talk to your real estate agent! She or he will explain any questions you have, including how the process works. Most importantly, your agent will refer you to a favorite lender who will pre-qualify you.
FHA Loans
FHA Loans are insured by the Federal Housing Authority and require a small down payment, typically in the 2.5 to 5 percent range. FHA loans are very popular with first time homebuyers who do not have a lot of cash to use as a down payment. Most FHA buyers are in the $150,000 purchase range.
FHA loans have several advantages and disadvantages. They require a small down payment and usually allow for higher debt-income ratios (it's easier to qualify). Also, FHA loans are assumable (you can assume someone else's FHA loan and vice versa). However, you must pay dual insurance on FHA loans. Since FHA loans are considered higher risk, you have to first pay an up-front MIP (mortgage insurance premium) one-time fee in the case of loan default. Also, a second MIP is factored into your monthly payments. Finally, since FHA loans are considered a higher risk, the interest rates are usually higher than conventional loans.
VA Loans
VA Loans are guaranteed by the Veteran's Administration. You must be in the military, or a veteran, to qualify. The largest benefit of VA loans is you don't need a down payment, and very little cash to move in. On the downside, VA loans require a funding fee that is typically "rolled into" the loan. This means your mortgage can be substantially higher than the value of your home. If you plan to live in the home for a short period of time, you run the risk of losing money when you sell. In this scenario your mortgage obligation could be higher than the market value of your home. Furthermore, VA lenders typically require very tough inspections, which can bog down the home buying process.
Conventional Loans
Conventional loans are the most popular type of loans.
Generally, the more you put down, the less of a risk you are to lenders. If you put down at least 20% of the purchase price of the loan, you won't have to pay PMI (private mortgage insurance that lenders require to protect themselves in case you default). Also, if you put down at least 20%, you are likely to get a lower interest rate. If you put down less than 20%, you will be required to pay the PMI, which will be built in to your monthly mortgage payments.
Conventional borrowers typically pay all of their own closing costs. Furthermore, the appraisal process focuses entirely on the market value of the home, not necessarily the condition it is in.
Fixed rate versus adjustable rate loans
When you choose your loan, you will have the option of getting a fixed or adjustable interest rate. The advantage of fixed-rate loans is the ability to lock in a low interest rate (if interest rates are currently low) for the lifetime of the loan. There's a lot of security knowing your payments will be the same year after year!
If interest rates are high, consider an adjustable rate mortgage (ARM). The interest rates on your loan adjust up and down, depending on the index the rate is tied to. With an ARM, if interest rates go up, your mortgage payments will go up (there IS a cap on how much they can go up each year). Conversely, if interest rates go down, so will your mortgage payments. The advantage of an ARM is interest rates are currently high, you can make mortgage payments based on current interest rates in hopes that eventually interest rates will fall. Once they fall, you can refinance your adjustable rate mortgage into a fixed mortgage and lock-in lower interest rates for the lifetime of the loan. On the downside, if interest rates continue to rise after you get an adjustable rate mortgage, the monthly payments can become onerous.
Term of the loan: 30 year vs. 15 year
Loans typically come in 10, 15, 20 or 30 year terms. By far, 30-year loans are most common. The advantage of a longer-term loan is the much lower mortgage payments spread out over 360 months. The downside is the higher amount of interest you will have to pay over the lifetime o the loan. Shorter term loans are will save you a lot of money interest. However, the monthly payments are much higher (typically 15 year mortgage payments are 25% higher than 30 year payments).
I hope this informational report was informative. As your local real estate professional, I am available to answer any questions you have about the best type of loan for your circumstances. You can call me at any time for advice, and please remember that you are under no obligation or pressure of any kind. I would very much like to help you.
Buying a home . . . that's what everyone says you should do, right? Get the lowdown on home values, costs of ownership and your own financial situation before making a big commitment that truly isn't for everyone.
By Liz Pulliam Weston
If you’re feeling pressure to buy a home, you’re not alone.
Home prices are spiraling ever upward, indicating a demand that’s outstripping the available supply. Wait too long to buy a house, many people fear, and you could find yourself priced out of the market -- or at least out of the neighborhoods you like best.
Meanwhile, mortgage lenders are bending over backwards to give people money to buy homes. They’re allowing people to take on more debt or get loans with worse credit, than ever before.
But that doesn’t mean everyone should be a homeowner. It’s a bigger commitment and more expensive than most first-time buyers ever realize. You should have a clear idea of what you’re getting into before you commit to 30 years of payments -- and you shouldn’t let any of the following popular myths guide your decision.
‘A house is a better investment than the stock market’
It’s become popular, with the current anemic stock market, to tout homeownership as the new best way to build great wealth.
When, oh when, will we learn that past performance is no guarantee of future results?Check out your options.
Record low rates
could save you a bundle.
It’s true that owning a home can be a good financial foundation, because it forces you to save (in mortgage payments that build your equity) and offers you the potential for great leverage. Leverage, simply put, is the ability to invest just a portion of the purchase price, borrow the rest and reap outsize rewards from any appreciation.
Say you put down $20,000 on a $100,000 home, borrowing the balance. If your home appreciates 10%, your equity in the home has grown by 50%. ($110,000 minus the mortgage of about $80,000 equals $30,000, or 50% more than you invested.)
Home prices, however, don’t always go up.
Ask homeowners in Boston, Dallas, Houston, Anchorage and Southern California -- all of which suffered major real estate recessions in the past 20 years.
After dropping more than 20% in the 1990s, Los Angeles home prices took almost 10 years to regain their peak, says real estate expert John Karevoll, an analyst with DataQuick Information Systems. Anyone who lived here during that time knows people who were “upside down” -- owing a bigger mortgage than the home could be sold for. Thousands of people simply walked away from houses they couldn’t sell, trashing their credit ratings in the process.
It’s hard to know, in advance, when you’re buying into a real-estate bubble. That’s why you should be relatively sure you won’t need to move anytime soon if you buy a home. Three years is probably a minimum, five years is better and 10 or more will help you ride out all but the worst real-estate crashes.
‘I’m tired of throwing away money on rent’
You’re not really throwing money away when you send a check to your landlord. You’re exchanging it for a place to live. You’re also getting flexibility and freedom -- things you sacrifice when you buy a home.
When you’re a renter, it’s the landlord, not you, who is generally responsible for maintenance, repairs and fixing the toilet that blows up in the middle of the night. If the neighborhood should start to slide, or you get or lose a job, you can up and move with a few weeks’ notice (less, if you don’t mind losing your deposit).
It’s true that you may have to deal with rising rents and recalcitrant landlords. Homeowners, however, are often stuck with rising taxes and maintenance costs, as well as recalcitrant neighbors.
Moving is never fun, but moving when you own a home is an expensive, time-consuming process. Finding a buyer can take months in all but the hottest markets, and you should figure selling costs will eat up about 10% of your home’s value, once you add agent commissions and moving expenses.
In other words, homeownership is more like marriage; renting is more like living together. Make sure you’re ready to be wedded to a house before you propose to leave behind life as a renter.
‘I need the tax deduction’
Would you give someone a buck just to get 27 cents in return? That’s essentially what you’re doing when you take on a mortgage just to get a tax deduction.
If you’re in the 27% federal tax bracket, every dollar you pay in mortgage interest only saves you 27 cents in taxes.
Don’t misunderstand -- the tax break is nice, and you need somewhere to live. But you should make sure you can really afford to own a home before you take the plunge.
Remember that many of the real costs of owning a home aren’t deductible. Uncle Sam won’t give you a break for insurance, repairs or maintenance, for example -- and those costs can really add up.
Most homeowners should plan to spend at least 1% of their home’s purchase price each year on maintenance and repairs, says finance expert Eric Tyson -- and more if they plan to hire someone else to do all the work. Tyson, co-author of “Home Buying for Dummies,” recommends setting aside some money each month into an emergency fund. You may not spend the whole amount every year, but sooner or later a big expense will come along -- a new furnace or roof, for instance -- that will consume several years’ worth of savings.
If you fail to maintain your home properly, you’ll pay even more when it comes time to sell. Many buyers won’t even bid on a property that shows significant neglect. Even in hot markets, buyers are likely to ask for expensive concessions to pay for the repairs you should have been doing all along.
The best advice on the issue of whether to buy vs. rent remains the time-tested version: Buy a home when the timing’s right for you, when you can swing all the costs and when you plan to stay put awhile. That way you can ride out any downturns in the market and benefit from any appreciation while enjoying a nice and affordable home in the meantime.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN