You’ve spent years building up your savings, but don’t own a home yet? If you aren’t in the market to buy a home now, you should reconsider. Here are reasons why you’re missing out if you don’t get in on buying a home now.
Reason #1: Deals like these won’t last long.
Those words are pretty bogus in car commercials, but they couldn’t be more accurate for the housing market. Home prices are starting to go up after having plummeted during the last 5-10 years. If you don’t seize the moment (which, to your benefit, happens to be lingering much longer than most moments worth seizing), home prices will start to get beyond your reach.
Reason #2: Interest rates are dirt cheap, but won’t stay that way forever.
Mortgage rates are ridiculously low (historically), and everyone’s expecting rates to rise, maybe sharply, before the end of this decade. Until a few years ago, getting a mortgage rate for 8 percent to 10 percent was considered a good deal. Now, you can find mortgages around 4 percent.
Is that difference meaningful? If you were to own a house for 10 years, the difference in mortgage payments between a 4 percent mortgage and 8 percent mortgage paid over 10 years is about $37,000 for every $100,000 you spend on the house. So, if you had a $400,000 mortgage at 8 percent, after 10 years, you’d have paid $148,000 more to the bank than if your rate were 4 percent rate.
Reason #3: A valuable financial opportunity will pass you by.
Imagine yourself on a riverbank, watching people in boats going past you, on to new places. At some points, the river picks up speed then, later, slows down. You can only just stand there on the side as all these people flow past you and out of sight. This is analogous to the home ownership market.
Other people are buying homes, waiting for them to appreciate in price, selling for more than they paid, and using the profit to buy a nicer home. Many of them hope to do this same thing a few times or more in their lives, until they can afford a much better home than their first home, even though essentially they only had to use their own cash for that first home, their least expensive home of all. Imagine you, on the other hand, just continuing to pay rent and have nothing to show for it.
Here’s a simplified example. You buy a house for $150,000 and pay a 10 percent down payment ($15,000). Three years from now, your income has gone up somewhat, your house is worth $200,000, and you’ve paid your mortgage down to $145,000. So, you sell the house for $200,000 and (after paying off your mortgage, paying broker fees, etc.), say, you’re left with $50,000. You now decide you can afford to buy a $350,000 house if you make a $50,000 down payment.
OK, say the housing market shoots up in the next 10 years (as has happened before), your income has gone up some more, and your house has doubled in value to $600,000. If, for example, you’ve paid down your mortgage to $300,000 and sell the house for $600,000, you might have $250,000 or so after costs. This time, if your family has grown in size, you might decide you can buy a $900,000 house, make a $250,000 down payment, and be able to afford a $650,000 mortgage. You’re now living in a $900,000 house — and the only true out-of-pocket cash you ever laid out was your original $15,000.
Or, you could’ve just chosen to stay on the riverbank and never jump into the flow.
Reason #4: You get to keep more of your earnings.
In the year you buy your home, you’re allowed to take a tax deduction for some of the costs of buying. Best of all, though, you get to deduct your mortgage interest payments and your property taxes every year. This can really add up in extra annual spending money.
For example, if you’re in the 25 percent tax bracket and you were to pay $24,000 a year in mortgage interest ($2,000/month), you’d pay $6,000 (25 percent) less in taxes than if you were pay rent of $24,000 a year. What would you do with an extra $6,000?
So, it stands to reason that you’d probably really love to be able to buy what might be the most expensive material object you will every buy — a house — use mostly other people’s money to pay for it, see it increase in value over time, and live in it the whole way through.
What are you waiting for? You’d rather put your cash into a savings account (so a bank can pay you almost nothing), than buy a home now?