First-Time Home Buyer Tips - When Buying is Better

When Buying is Better  

 

It's the rare person who doesn't resent handing over large sums in rent every month. Even if the very idea of a 30-year mortgage makes you shiver, the fact is, over the long term, building equity in your own property is far smarter than financing someone else's. A fixed rate mortgage also locks in your monthly rate so you know that whatever your payment is, at least it will stay the same for thirty years. Even with an adjustable rate mortgage (ARM) you know your monthly cost will hover within a plus or minus dollar range for the term of the mortgage. Rent, on the other hand, has the nasty habit of increasing every year. If you're already struggling to meet today's exorbitant rents in major metropolitan areas, imagine what they'll be like 10 or 15 years from now.

Tax breaks
Probably the best reason of all to consider buying a house is the tax break. As the tax code is structured now, interest on home equity loans for up to $100,000 can be deducted, as can property taxes. With rent, that money's down the drain. It's as though Uncle Sam is actually helping pay for the house you buy. Even when it comes time to sell, homeowners can benefit from tax-free profits on the sale of their primary residence, up to $500,000, if they are married and filing jointly and have occupied the home for two of the last five years. Those who are single or married and filing separately, can enjoy tax-free profits up to $250,000.

Three-bedroom savings account
In the eyes of the banking community owning a house is considered a major savings asset, which is why credit card applications ask specifically if you rent or own. Because a portion of every mortgage payment goes toward the principal, (not a lot in the early years but it gets better over time), the homeowner is building equity. In addition, property values appreciate at a current average of five percent per year. This figure shifts from time to time and especially from market to market. But there is added bonus to property appreciation that makes the home owning process even more attractive: the appreciation is on the entire value of the house, yet the homeowner is only out of pocket for the down payment which is a fraction of that. So, the actual rate of return on the investment (which is a better comparison with what you would get in Wall Street, for example) is much greater than the appreciation rate. Even as your debt to the bank remains constant, what you get when you sell the house does not. As time passes, equity builds and thus weakens this advantage somewhat because the investment is becoming a larger percentage of the value of the house. This is why many experts advocate refinancing a house after about 7 years. Ideally the homeowner would then invest the money from the new loan elsewhere. Usually however such money is used as a windfall for consumer needs and a substantial retirement investment opportunity is missed out on.

In general, buying a home is considered a secure investment because prices usually don't go down, unless you bought in an extremely volatile market, or next door to a nuclear power plant. The longer you put off buying a house, the longer you'll miss out on appreciation. and the opportunity to build equity instead of wasting money on rent.

Personal freedom
Aside from the money, owning a home brings freedom to create your own personal space without limits set by a landlord. When you think about it, a rental isn't really your home, it's someone else's on loan and they probably don't agree that the bathroom looks cool painted deep purple. Nor is a landlord likely to pay for such personal touches and why should you if you're only renting and it's ultimately to someone else's benefit? But when a home is yours, bought and mortgaged for, you can get creative any way you want and know that all the improvements add value to your investment in the long term.