There’s a great saying about home ownership that goes: “Everyone pays a mortgage every month and everyone buys a house; it´s just a matter if it´s yours or your landlord’s.” That’s 100% true when you think about it, because over a lifetime of paying rent, whether it’s in an apartment or house, your money is going to pay for the landlord’s investment. Of course renting is right for some people based on their financial situation and housing needs, but there is a huge number of renters out there who would love to achieve the American Dream of owning a home, but they just aren´t sure how to get started or they have reservations. So we put together a list of seven things every renter should know about home ownership, which could very well turn them into first time home buyers!
Rents are going up.
After the real estate crash in 2008, it was an extreme buyer’s market, with investors a large part of those who scooped up foreclosed and distressed homes to rent them out. Since then, there’s been a profound shortage of affordable apartments, condos, and houses, particularly in popular metropolitan areas. Rents have risen steadily over the last few years and experts are calling it one of the biggest imbalanced rental markets ever. That means what you spend on rent every month has probably gone up and probably will go up again.
In fact, these days, most first-time home buyers are purchasing their home and spending less than they did for rent!
You’re missing out on tax deductions.
The federal government long ago decided they didn´t want to be in the business of housing the American people, so they instituted generous tax breaks for private real estate owners. Owning a home is still one of the best tax breaks you´ll ever get. In fact, the interest you pay on your mortgage is tax deductible, as are a lot of repairs and upgrades, meaning you keep much more of your hard earned paycheck in your pocket. And when it´s time to sell your home, there are generous tax laws that allow you not to pay proceeds on the profit up to a certain point if you´ve owned it two years. Consult your CPA or tax professional for specifics, but he or she will most certainly encourage you to buy your own home!
Interest rates are still low.
Too often, potential homebuyers are confused or scared by the news about interest rates and the economy, and that causes them to not act. They even have a term for this, ¨paralysis by analysis. ¨ But it´s important to realize that interest rates are near historical lows, and even if they move up a point or so in the next years, they are still great. In fact, the average mortgage interest rate since WWII is about 7.5%, so our current rate climate is fantastic. Additionally, when rates are high, home prices usually are trend lower and vice versa, so there really is no wrong time to buy as long as you do it correctly and can afford your mortgage.
There are programs to help first time homebuyers.
There is no denying that buying your first home (and getting your first mortgage) can be a confusing and overwhelming process with a steep learning curve. But it’s important to know that there are so many resources and places to get help for first-timers. Many banks and lenders have special programs for first time buyers, and governmental agencies like FHA, the Federal Housing Authority, specifically try to aid new buyers. In some locations and markets there are even grants or down payment assistance programs, so one way or another, you probably will have to invest way less than 20% for a down payment, and all of your questions and concerns will be addressed.
You’re only making your landlord money.
If you add up the financial advantages of owning a home versus renting, the numbers make a clear case. Think about two homeowners over a 5-year period, one who rents and one who buys a home. The renter paid, let’s say $1,200 a month for 5 years, or $72,000 toward their housing.
The homeowner paid the same thing, $1,200 a month, over 5 years for a similar sum, $72,000.
But the homeowner got tax breaks every year for paying that mortgage, paid down principle on the amount he or she owes (though it is slow in the first years,) and the value of his or her home may have gone up.
Your landlord understands the power of real estate as an investment, and loves it that you rent instead of buying your own property for these reasons.
Owning your own home is one of the smartest financial moves you can make.
Among millionaires and financially successful people, 95% attribute owning real estate as a contributing factor. In fact, owning your own home and possibly investment properties is one of the most well traveled paths to financial independence. Between the tax breaks, paying off a mortgage over time, and appreciating values, it’s hard to fathom why more people don’t buy their home.
Of course you should own stocks, plan for your retirement, own a business, etc. to achieve wealth, but having your own home is so fundamental that it’s really the cornerstone of your financial picture.
Over time, houses have always gone up in value.
There are very few “sure things” in life and even fewer in business, but real estate always goes up in value once you hold onto it long enough. Of course there are market swings and fluctuations, real estate booms and then corrections, but the beautiful thing about owning a home is that you don’t realize that loss unless you sell during that time – you can just wait for it to go back up in value. And over the history of real estate in the United States, there has never been a decade where houses haven’t appreciated in value. As they say, there are more and more people every day, and they aren’t making more land, so the best investment on earth…is earth – your own home!
Renting is now twice as expensive as owning a home.
It’s now about half as expensive to be a homeowner than it is to rent in the United States. That’s the conclusion of a new study by the real estate website Zillow, which tracked the monthly allocation of income toward mortgage, or rent for those who did not own their own home. As of the third quarter of 2014 they found that renters paid an average of 29.9% of their monthly income toward rent, compared to an average of 15.3% for homeowners. The study aimed for impartiality by measuring only a segment of the population who owned the average home in their market, versus renters.
More renters are paying at least 30% of their income toward housing.
Currently, half of all U.S. renters pay more than 30% of their income to rent every month, which is the accepted barometer for housing affordability. That’s a marked increase from only 18% of renters paying more than 30% of their income a decade ago. The problem is even worse for those on the lower end of the economic scale, and an astounding 30% of renters pay at least 50% of their income to housing costs. California is one of those states where at least half of all renters pay more than 30% of their income toward rent.
There are plenty of creative ways to save for a down payment.
Have you thought about buying your first home, only to cancel out that dream once you look at the down payment requirements? There’s no getting around the fact that it takes a whole lot of money, all at once and up front, in order to buy. But the good news is that there are more great loan products hitting the market that appeal to first time buyers. So with a little planning, creativity, and sacrifice, you may be able to afford that down payment for your first home, after all.
Contact Blue Water Credit if you have questions about buying your first home, and here is a whole list of creative ways to save for a down payment!