By Josh Lewis
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15 Sep, 2023
At any given time, roughly 65% of American households own their homes. As a group, these homeowners have 40x greater net worth than renters with nearly half of that wealth in home equity. You can probably guess that I believe everyone should own their home. But does that mean every renter should run out and buy a home this weekend? ABSOLUTELY NOT! You have to buy when the time is right in your life. Before we dive into a few simple questions for you to answer to determine IF now is the right time for you, let’s do a quick recap on what we’ve covered over the last few weeks. Self Liquidating Debt - You have to live somewhere. For most people, that means a shelter payment. Homeowners benefit by applying that monthly payment to pay down the mortgage on their home. Renters continue to pay rent on the 1st of the month. Every month. There Is No 30 Year Fixed Rent - More than 90% of homeowners with mortgages use a fixed rate loan. That means that regardless of inflation or home prices, the monthly mortgage remains constant. Owners even have an option to LOWER their monthly payment any time rates drop. On the other hand, renters have faced annual rent increases averaging 3.2% since 1985 . Owners Are Forced to Save - Those 30 year fixed mortgages require a monthly principal payment. Every month, owners make a contribution to their home equity account. And every month that contribution grows until the final payment when the loan is eliminated.The current new mortgage in the US averages just over $400,000 . At current rates, a homeowner with a $400,000 mortgage will reduce their loan balance by over $4000 in the first year and over $56,000 over the first ten. Owners Benefit From Leveraged Appreciation - Over the last 35 years, homes in the US have appreciated 4.2% a year on average. A homeowner making a 10% down payment would see a 42% return on their investment in year 1, increasing over time as equity builds. The Potential for SOME Homeowners To Enjoy Tax Savings - There were some pretty significant changes to the tax code in 2018. These changes had a major impact on homebuyers. Bottom line, the tax benefits of home ownership aren’t as great as what you might expect. Now that we understand the major financial benefits of home ownership, we need to remember that when it comes to making the significant financial commitment of buying a home, timing is everything. The current real estate market has many people asking, "Is now the right time to transition from renting to owning?" To help you answer this question, I've compiled a list of five critical questions you should ask yourself before making this life-changing decision. 1. Job and Income Security: Are You Ready for a Long-term Commitment? One of the first things to consider is the stability of your employment and income. Buying a home is a long-term financial obligation. If you're contemplating job changes, expecting promotions, or even a career switch that could relocate you, weigh these variables carefully. Flexibility in location may be an essential factor for your growing career. The key is being confident in your current income and career trajectory. Owning a home is important, but so is maximizing your earnings and job satisfaction. 2. Credit and Debt: Can You Afford a Home Mortgage? Before venturing into homeownership, take a close look at your credit score and overall debt. You may have seen social media posts about buying with credit scores as low as 580. While this is possible, it’s far from optimal. A low credit score will increase your mortgage rate and fees while limiting the loan programs that are available to you. A healthy credit score and a manageable level of debt will not only make you a more attractive loan candidate but also give you peace of mind that you are ready to become a successful homeowner. 3. Savings: Is Your Financial Cushion Adequate? Owning a home comes with multiple financial responsibilities beyond the monthly mortgage payment. Most buyers will need to have money for a down payment and closing costs. Once you get into a home, it’s important to have a reserve fund for unexpected maintenance and life expenses. Before making the leap, make sure you've saved enough not just to buy the house but also to have a financial cushion afterward. Owning a home is great, but not if it brings along financial stress. 4. Relationship and Family: What Does the Future Hold? A stable family situation is another essential factor. If there is a possibility of significant changes in your relationship status or family size—like a marriage,divorce or children—you'll need to consider how that will affect your housing needs. Perhaps you need to be closer to aging parents or other family members who require care. Factor in these elements when contemplating the location and type of home to buy. 5. Long-term Plans: How Long Will You Stay? The general rule of thumb is that you should plan on staying in your new home for at least 5-7 years to make the investment worthwhile. Unlike other investments, buying a home can have significant transaction costs. This period allows you enough time to build equity in your home and potentially see its value appreciate. While homes will always appreciate over the long haul, there can be periods of flat or even declining prices. Having a long-term plan ensures you are in a solid financial position when it comes time to sell. If you've answered these questions and feel confident about your answers, then it might be the perfect time for you to transition from renting to owning. If not, it's completely okay; continue renting until your circumstances align better with the responsibilities and commitments that homeownership entails. The bottom line is working on your career and income, saving and investing, and maximizing your credit while maintaining a manageable debt load will serve you well no matter what direction life takes you. As always, if you need personalized advice on mortgages or have questions about the real estate market, please reach out. I’m here to help! Looking forward! Josh