|Buying a first home can be an intimidating process. But the first step is deciding if: I want to own a home; I can afford to own a home; owning a home makes sense for me financially and emotionally. If you are still struggling with those decisions, here are some facts that might help you take that first step towards becoming a homeowner.|
|You Can’t Afford NOT to Buy a Home!
Over the last ten years, the cost of rental housing in the U.S. has increased an average of 3.5% per year. If that trend continues, that means that an apartment or home renting for $1,000 per month will cost more than $1,300 a month in ten years. If you rent the same home for ten years, the total amount you would pay for rent will equal $140,777!
Tax Advantages of Owning a Home Result in Savings
None of that $140,777 is returned to you, either through savings or as an investment. Home ownership, on the other hand, has tax advantages over renting a home, and those advantages can help you save money. For many homeowners, part of the monthly mortgage payment “comes back to you” in tax savings. Here’s an example:
|Monthly Mortgage & Tax Payments|
|property tax (.25% tax rate*)||208|
|Total Monthly Payment||$1,287|
|tax savings per month (assuming a 25% income tax bracket)|
|mortgage interest tax deduction||$216|
|tax deduction for property tax||52|
|Total Monthly Tax Savings||$268|
|Total Monthly Cost After Tax Savings||$1,019|
|*property tax rates vary by city and county|
You purchase a home that costs $200,000. Your down payment is $10,000 (plus closing costs – expenses incurred to actually process the transaction). You finance the balance with a 30-year fixed rate mortgage at 5.5 percent interest. Your monthly payments (not including utilities, maintenance, insurance, etc.) are:
Owning your own home reduces your federal income tax bill by $268 a month. In addition, as you pay down your mortgage loan and as home prices rise, your equity – the wealth you have in your home – increases.
|Total Annual Costs||Homeowner||Renter|
|annual mortgage/rental payment||$12,948||$12,000|
|real estate taxes||2,500||0|
|Tax Deductions/Equity Builders|
|mortgage interest deduction||2,592||0|
|tax deduction for property tax||624||0|
|mortgage principal accumulation||2,559||0|
|below trend growth**||1,200||0|
|Annual Costs Less Equity Gains||$12,000|
|below trend growth**||8,473||0|
* assumes a 1% annual depreciation
Buyers Come Out Ahead
Given that price growth has recently deviated from its usual pattern of increase, the table at left considers four different price growth scenarios, including a loss. You may be surprised to see that the homeowner still comes out ahead of the renter even if there is a decline in the home’s value over the next year. Extraordinarily low interest rates and lower prices have ushered in some of the best affordability conditions in a generation. Further, special tax advantages exist for buyers who purchase before July 1, 2009. Tax laws change, so ask your REALTOR® or tax advisor for current information.
|Year||Price Growth||Home Value|
|Total Appreciation After Ten Years||$ 86,948|
For the majority of Americans, their home is their largest financial asset and a major player in their investment portfolio. The NATIONAL ASSOCIATION OF REALTORS® estimates that home value rises, on average, by 4.5 percent a year. That’s a steady return on investment; one’s own home is a much less volatile asset than stocks, bonds or mutual funds, even when the recent downturn is considered.
As an example, let’s look again at that $200,000 home. Unlike your rental unit, your home should appreciate over time. Instead of assuming average growth, we assume that prices are flat in the first year of ownership and pick up, but only slightly, in the second year. In the third year of ownership, your home has appreciated to a modest $210,858. After ten years, assuming a return to an average 4.5 percent appreciation rate*, your $200,000 home will be worth $286,948. Not only do you earn a rate of return on your original purchase price, you also get a return on any subsequent appreciation.
* Average price appreciation from 1970 to 2008 was actually better at 6.0%
Home ownership Builds Wealth for Households
The Federal Reserve Board estimates that homeowners’ net worth has ranged between 31 and 46 times more than that of renters in the years 1998 to 2007. In 2007, the median net worth for homeowners was $234,200 compared to $5,100 for renters. Even though that difference will surely narrow as a result of house price declines since 2007, median homeowners will likely still have substantially greater net worth than median renters.” How do you build up your net worth? As a homeowner, you build wealth in two ways: through paying down the principle on your mortgage and through those “appreciating returns” on your home.
We’ve already seen how your $200,000 home could be worth $286,948 in ten years. In addition, you are paying down
|Year||Home Price||Mortgage Debt||Net Worth|
the principal on your mortgage. Remember that $200,000 you borrowed at 5.5 percent over 30 years – that debt amount is decreasing every month and every year as you make payments.
After the first year, you now only owe $187,441 on a home that is worth $200,000. As home price growth returns to a normal level the amount of wealth that you net from appreciation will increase. At the same time you pay your mortgage reducing your outstanding debt. As your debt decreases and the home value increases, you accumulate wealth from the value of your home. In addition, over this tenyear period, you will have a significantly lower after-tax payment for housing. Each year as your home appreciates and you continue to pay down your mortgage debt, you increase your own net worth.
Why Not Wait?
You may wonder whether it is worthwhile to wait to purchase your home until prices are at their lowest. Prices are not the only factor that should drive your decision. Currently, interest rates are at generational lows that greatly improve the affordability of homes. Further on the annual cost table, you can see that even if home prices decline, the possible tax savings of owning a home lead to a lower cost for the buyer, not the renter. Also, there are special, additional tax benefits for first time home buyers that may be available for a limited time only. Finally, and most importantly, when you have made the decision to commit to home ownership because you are financially ready, market conditions are a secondary concern. In fact, the NATIONAL ASSOCIATION OF REALTORS® 2008 Profile of Home Buyers and Sellers found that more than four in ten buyers purchased a home because the buyer was ready to make the commitment to home ownership.
Homeownership–It’s NOT Just About Money
The “numbers tell the story” examples should ease your mind about the financial aspects of becoming a homeowner. But there are other, less monetary, benefits to home ownership that may partially explain the fact that buyers buy when they are ready. Several research studies indicate that home ownership adds to the value of communities, has positive effects on children, and even contributes to increased voter participation rates.
Home ownership: The American Dream
More than two thirds of American households own their own home. They know the benefits of home ownership, from the accumulation of home equity, tax incentives, and the pride of owning a place of their own. They also had to take that first step of deciding “I’m ready to be a homeowner.” REALTORS® assisted many of today’s 75 million homeowners in both their decision to buy and their first home purchase. REALTORS® are real estate professionals who are members of the NATIONAL ASSOCIATION OF REALTORS® and who abide by the Association’s strict Code of Ethics and Standards of Practice. They can help guide you to first-time home buyer programs in your area, as well as assist you in searching for and buying your home.