Buying Your First House
Owning your own home
has been part of the "American Dream" for years. The pride of ownership
and sense of belonging somewhere have been strong factors in motivating
over 60% of all households to own their own home. In addition, there can
be true financial rewards of home ownership. But, not always.
Here are some financial
issues to consider as you move toward that "American Dream" of owning
your own home.
Home values rose substantially
in most parts of the country seveal years ago. With a strong economy,
the demand for housing has pushed up the prices people have been willing
to spend. These rising values have enabled many to reap large profits
when they sold their homes. However, home values do not always appreciate
and certain areas can be hit hard when a slow down in demand occurs. We
are now seeing homes drop in value and in some cases drop substantially.
If you plan to stay
in an area only a short period, renting may be economically advantageous.
The costs of buying a house (realtor's commission and closing costs),
moving (hiring a mover or renting a truck) and getting a mortgage (points
and loan origination costs) can add up. If the value of the home has not
risen by that total when you are ready to sell, you will end up losing
If you have a great
apartment and a great deal on rent, it may be very difficult to own the
home you want at anything close to your current costs.
Now some good news
If the value of the home you buy goes up, you can profit in a leveraged
way. Let us assume you buy a home for $150,000 with a $25,000 down payment
and then sell the home for $175,000 (after all costs). Your cash proceeds
would be $50,000, or a doubling of your actual cash investment. In other
words, the home appreciated about 17% and you made 100% on your money.
Remember that leverage works in reverse if prices fall.
There are tax advantages
with owning your home. Many homeowners are able to itemize deductions
for mortgage interest and property taxes on their home. This can result
in savings when you file your tax return. The IRS also allows you to defer
any taxes on any gain on selling your home if you buy another more expensive
home within a given period. There are also tax breaks on gains if you
are over age 55 when you sell your home. Investigate these tax advantages
or talk to a tax accountant to completely understand the tax advantages.
You build up equity
in your home as you make mortgage payments. Every mortgage payment you
make includes interest and principal repayment. Over time, the principal
repayment reduces the remaining amount you owe. In the first few years,
most of your payments will be interest. It is in later years that your
equity build-up really takes hold. Here is a chart showing how your mortgage
payments slowly convert from mostly interest to mostly principal over
the life of a 30-year mortgage.
Here is a chart showing
how the interest and principal portions of a $100,000, 30 year mortgage
change over time. Notice that the majority of the principal repayment
comes later in the life of the mortgage.
Home ownership provides
financial flexibility. Your home may be the most valuable asset you own.
It can serve as a reflection of your financial stability and it can even
be a source of collateral for other borrowing. With a home equity loan,
you essentially are pledging the equity in your home for additional borrowing.
Home equity loans can be a low cost way of consolidating any other debts
you have, perhaps at a lower interest rate and probably get some income
tax benefits along the way.
If you are like millions of others, owning your own home is a primary financial
and lifestyle goal. The pride of ownership and the financial rewards are
attractive. Just make sure you understand that there can be some downsides
before you make the decision.