Advantages Of Home Ownership
Although home ownership offers a lot of advantages, it is not suitable for everyone. You need to learn whether home buying is the best option for you. Firstly, if you have been strongly urged to buy a home now, you are probably hearing it from people in the real estate business such as agents and mortgage lenders, etc. These people tend to endorse home ownership no matter the economic conditions since they rely on home buyers for income. Even the best selling home buying guidebooks are written by authors who have a vested interest in a thriving property market. So how do you know if it is better to buy a home versus renting one?
Most people should eventually buy homes, since it is a great way to accumulate wealth progressively but you need to do so at the right time. Only then will all the advantages of buying a house with no money down benefit you in the long run. Owning a house can be cheaper compared to renting one, even though the expenditure outlay seems larger in the beginning.
Here is a quick way to calculate the price for a home you can buy now that will only cost you the same as your monthly rent:
simply multiply your monthly rent by 200
For example, you are now paying $1,000 every month to rent a house. This is equivalent to paying $1000 monthly mortgage to buy a $200,000 home, and you will own it completely in future, which means no more monthly rent or mortgage payments.
Do not let the high cost of buying a house today scare you. As a renter, your monthly home rental very sensitive to the prevailing cost of living, otherwise known as inflation which is expected to grow at 3% to 5% every year. Thus, you can also expect your landlord to increase your home rent by 4 percent per year on average. This means that if you are currently paying $1,000 monthly rent for your home today, your monthly rent in 10 years time will be almost $1,500 assuming 4 percent annual inflation.
When you are still young and in your 20s or 30s, you may think that buying a house is expensive, but by the time you reach 40s, you will probably be regretting not doing so and having to put up with expensive monthly rent payments. On the other hand, paying a $1,000 mortgage today is sufficient to buy a $200,000 home which becomes your asset when it is fully paid up. If you continue to delay your home purchase decision, you have to pay much more money for the same house in future.
Even if you are in your 40s or retired, you should not underestimate the number of years of housing you need. With increasing life expectancy of over 85, buying an affordable home is still recommended over paying long term rent.
Contrast the fact that while the cost of purchasing a home increases with inflation, your fixed rate monthly mortgage is independent of the prevailing inflation rate. That means your monthly home loan payment is fixed compared to a renter who needs to pay more every year for living in the same house.
Buy A Home With Fixed Rate Mortgage
A fixed rate mortgage is highly recommended today since it can lock in the current low mortgage rates for the next 10 to 30 years and you can pay a fixed monthly mortgage payment. This is a more conservative approach compared to an adjustable-rate mortgage payment that will fluctuate according to the market interest rates. The only exposure to inflation faced by home owners are the annual property taxes, homeowner insurance premiums, and maintenance expenses etc which are relatively small.
Buying a home is the first step towards financial stability for many people, since you will need a place to live in. Inflation will always be increasing the cost of living, and home prices tend to appreciate over the long term. Even if you need to reduce other forms of discretionary spending, it is recommended that you buy a home you can afford now. The longer you choose to delay this decision, the more money you have to spend on rent. Remember that the main problem with long term rental is that your housing costs will continue to increase over time.
An advantage with home ownership is that you can really invest in home improvement projects to change your living space and any things you do not like, such as faded paint work, obsolete home appliances etc. These will also add to the market value of your home. However as a tenant, paying for such additional touches with home improvement loans will only benefit your landlord.
Home prices generally appreciate in value over 10 year windows which means you can actually sell the house for more than what you have paid for previously. This allows many households to upgrade to larger homes in addition to the increased income they are enjoying now. Although the housing market can be subjected to downturns, such as the recent one caused by the sub prime mortgage crisis, the long term trend for home values is still up.
Building up Home Equity
And if you are the type of person that cannot seem to save any money consistently, paying your home loan is actually akin to a form of monthly forced savings since you are actually building up home equity in the property you are living in. Home equity refers to the difference between the fair market value of a home and the outstanding loan you owe. You can borrow against your home equity at cheaper rates compared to other forms of long term personal loans since it is secured and low risk for the lenders.
For example, the home equity can be used in a reverse mortgage for seniors to supplement their retirement income especially when you do not have any savings. Owning a fully paid up home with no more monthly rent or mortgage to worry about is a big step towards financial freedom and this actually makes retirement a much more pleasant time.