I can’t tell you whether or not you should buy a house…
And although I bridle at the restraints on my right to free speech, even if I were allowed to offer you my individualized advice, I would refrain. I simply can’t know what’s right for you without knowing a lot more about you, your finances, and your goals.
I believe the purpose of saving and investing is to provide financial security – not to own a home or any other asset.
However, for a lot of people, owning a home is a critical part of their financial plan. Let me show you what I mean…
Homeownership can provide a way for you to leverage the power of credit in our economy to your benefit. It can also help shield you from the impact of inflation and the deterioration of the U.S. dollar.
And it can turn part of the money you’d spend in rent into equity in real property – a form of savings.
It can be expensive to own a home. I’d recommend making sure you can easily afford a 20% down payment. I’d also make sure I had at least one year’s worth of mortgage payments available in savings first.
After those hurdles, there’s a slew of questions that you should think carefully about. The most important is: What’s the cost of your mortgage? If you have a low-interest, low-cost mortgage, buying a house can be a great deal.
Next, I’d try to figure out all of my costs to own a home (e.g., mortgage origination, interest expenses, taxes, and upkeep) for the period that I’m likely to live there.
So, for a $350,000 home over, say, 10 years, that’s probably something around $200,000 in total expenses, including interest payments. Seems like a lot, doesn’t it? Well, I’m only assuming an average 3% interest expense over 10 years, a 1% annual maintenance cost, and 2% for property taxes and insurance. Your actual costs of homeownership will likely be higher, including the principal repayment on your loan.
But let’s use this rough estimate for now. That’s roughly $20,000 in expenses per year to own your home. You could rent a house for $1,500 a month and probably save money – or at least, it would look like that in the short term.
Over the long term, though, the picture changes…
The money you “spend” to buy a house can end up becoming a form of savings – as long as the house appreciates in value.
Look at these assumptions. At the end of 10 years, you’ll own roughly 65% of the house (assuming a 15-year mortgage). And assuming real estate prices have increased 20% to 25% over the period, your house should be worth roughly $435,000 after 10 years.
That means your equity would be worth about $280,000, or 40% more than your direct expenses. So even though buying costs more than renting, it can still be the better way to go.
For most people who buy houses in areas that have both rising populations and rising wages, owning a home can easily be one of the most important and best financial decisions they make. Buying instead of renting essentially allows them to turn one of their biggest expenses – rent – into a form of savings.
Just be aware that the financial outcome of buying a house depends almost entirely on what you have to spend to borrow the money, and on whether or not the area you buy in appreciates in value while you own the home.
If both these conditions are in your favor… it can be a great decision for your long-term wealth.
Regards,
Porter Stansberry
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Source: Daily Wealth