All Articles on Buying | Back to Previous Page
Advantages of Buying |
Home Finance 101 |
Preparing to Shop |
Your Real Estate Team |
Making an Offer |
Getting a Mortgage |
Closing the Deal |
After You Buy
Advantages of Buying
1) Owning versus Renting, 2) Renting and Inflation, 3) Wealth and Equity
1) Owning versus Renting
Our goal is to ensure that you're happy with the home you buy and that owning the home helps you accomplish your financial goals. To decide whether now's the time for you to buy a house, consider the advantages of buying.
Owning may be less expensive then renting
Here's a guideline that may change the way you view your monthly rent. To determine how much home you can afford to buy while having the same approximate monthly cost as your current rent, simply do the following calculation:
Take your monthly rent, multiply by 200 = purchase price of home
Example: $ 750 x 200 = $150,000
In the preceding example, if you were paying rent of $750 per month, you would pay approximately the same amount per month to own a $150,000 home (factoring in tax savings).
The costs as a renter in the future are even more important than the costs of rent today. As a renter, you are fully exposed to increases in the cost of living, also known as inflation. A reasonable expectation for annual increases in your rent is 4 percent per year.
2) Renting and Inflation
When you're in your 20s or 30s, you may want to start thinking about your golden years. Paying $750 rent per month now is the equivalent of buying a home for $150,000. In 40 years with approximately 4 percent inflation per year, your $750 per month rent may increase up to $3,600 per month. That's like buying a house for $720,000!
Once you purchase a particular home, the bulk of your housing costs are not exposed to inflation -- if you use a fixed-rate mortgage to finance the purchase. Therefore, the comparatively smaller property taxes, insurance, and maintenance expenses are the only housing costs you will have that may increase over time with inflation. In the decades ahead, you will be glad you purchased a home today because as illustrated, renting long term can expose your housing costs (rent) to inflation.
3) Wealth and Equity
Over the many years that you own your home, it should become an important part of your financial net worth -- that is, the difference between your assets (financial items of value that you own such as bank accounts, retirement accounts, stocks, bonds, mutual funds, et cetera) and your liabilities (debts). This is because homes generally increase in value over time while you're paying down your loan (mortgage debt) used to buy the home.
Home equity (which is the difference between the market value of a home and the outstanding loan on the home) will help your personal and financial situation in a number of ways. If you plan to someday retire, your home's equity can help supplement your other sources of retirement income.
Tapping into equity
How can you tap into your home's equity? Some people choose to trade down -- that is, to move to a less expensive home in retirement. Sell your home for $250,000, replace it with one costing $150,000, and you've freed up $100,000. Subject to certain requirements, you can sell your home and realize up to $250,000 in tax-free profits if you're single; $500,000 if married.
Another way to tap your home's equity is through borrowing. Your home's equity may be an easily tapped and low-cost source of cash (the interest you pay is generally tax-deductible).
Some retirees also consider what's called a reverse mortgage. Under this arrangement, the lender sends you a monthly check you can spend however you want. Meanwhile, a debt balance (that will be paid off when the property is finally sold) is built up against the property.