Why You Should Start Planning To Purchase A Home
If you’ve ever thought about buying a home, but decided that it was too big a
financial gamble, think again. It’s possible you haven’t considered the risk of not buying a home. We all know how big of a step this can be for many people, but it is worth it, especially if you do everything in the right way. From using a lifetime mortgage to finance long-term care, to paying your debts and keeping your taxes in order, there is so much to think about before getting a mortgage.
For the majority of working people, home ownership is the single most reliable way to achieve financial security. Without it, you may find it almost impossible to gain access to the kind of capital you’ll need to support yourself in your later years, pay for your children’s education or start a new business.
Home ownership among young Americans has dropped alarmingly in recent years. In 1980, 52 percent of all 25 to 34 year-olds owned a home. By 1990, only 45 percent did, and among 34 to 44 year-olds, home ownership had dropped from 71 percent to 66 percent. According to Katherine S. Newman, author of Declining Fortunes: The Withering of the American Dream (Basic Books), those who don’t get into the housing market by a certain age may have made “a misstep that will dog their heels for the rest of their lives.” The primary reason for the decline in ownership among the young is cost. The price of housing more than doubled between 1975 and 1985, and mortgage interest rates skyrocketed.
Fortunately, the pendulum has swung back, as others like Rivington Mortgages will tell you. Since 1991, overall housing prices have remained stable, though in some areas of the country they have fallen by as much as 25 to 30 percent, and mortgage interest rates have dropped dramatically. But if, like many young people, you grew up in an overheated housing market, you may continue to think of home ownership as something beyond your reach. Here’s why that attitude could be a big mistake.
1. You may wait a long time to see rates this good again.
Let’s say for example that you recently saw a house selling for $125,000. And for the sake of discussion let’s say you have $20,000 in savings to use as a down payment; a $105,000 30-year mortgage at 4.75 percent would cost you $548a month, and you might have another $175 a month in real estate taxes, for a total of $723.
But you are hesitating: $723 feels like a stretch for now, since you’re paying only $625 for your rental. But if you wait, and prices and mortgage rates rebound to the levels of five years ago, the exact same home might cost you $150,000, and you could be paying a 7 percent interest rate. The bottom line: You would be stuck with mortgage and tax payments of $909 – almosthalf as much as your current rent – for exactly the same home.
A 30-year fixed-rate mortgage averaged 4.80 percent in the week ending April 21, down from 4.91 percent last week, according to Freddie Mac‘s weekly rate report. A 15-year fixed-rate loan averaged 4.02 percent, down from 4.13 percent.
A one-year adjustable-rate mortgage averaged 3.16 percent, dropping from 3.25 percent last week.
“Low inflation is keeping mortgage rates at bay,” says Frank Nothaft, chief economist for Freddie Mac (OTC BB:FMCC). “The 12-month growth rate in core prices was 1.2 percent, which is rather low by historical standards.” Read more: Freddie Mac: Mortgage rates head lower | Triangle Business Journal
And according a recent Survey by Rassmussen; Fifty-four percent (54%) of all Americans believe interest rates will be a higher in a year’s time, a finding that has stayed in the mid-to high 50s since July 2009. In April of that year, just 34% expected interest rates to go up.
2. Renting deprives you of big tax breaks.
Home ownership is one of the last remaining tax shelters. In the example above, You would be able to deduct about $6,500 in mortgage interest and real estate taxes on your annual tax return. If you earn $30,000 a year, which puts you in the combined 31 percent federal and state tax bracket. Your tax savings could come to about $2,100 a year, or almost an additional $200 in take-home pay each month. If you rent, you get no tax breaks whatsoever.
3. You need to start small to trade up.
You may feel that there will be plenty of time to get into the housing market when you feel financially secure. The problem is, you’ll probably need the profit you’ll make by selling your “starter” house to be able to afford the one that you’ll want in the future.
Between 1968 and 1992, the median price of a single-family home rose an average of 6 percent a year, according to the National Association of Realtors; over longer periods, the increase has been between 3 and 4 percent. That’s great – if you buy early and hang on to your purchase. If you don’t, you’ll have to keep up with those increases through other investments, which is generally difficult to do.
4. Your future is going to be expensive.
Financial experts generally suggest that to retire, you’ll need to build up enough in savings and investments to generate yearly income of 70 percent of your pre-retirement income. That’s a tall order – and a reason to start amassing some serious capital soon
Ricardo Cobos is a Mortgage Loan Officer in Raleigh North Carolina expertly assisting financing homes with no money down using USDA Guaranteed Rural Development Loans and Down Payment Assistance Grants.
Call or email me your USDA Rural Development questions to
(919) 559-3384, I’m here to help!
- Home Sales Drop %15.1 in Raleigh North Carolina (theraleighmortgageguy.com)
- 30-year Fixed-Rate Mortgage Matches Yearly Low of 4.71 Percent (theraleighmortgageguy.com)
- Little Change in Mortgage Rates (theraleighmortgageguy.com)
- U.S. Mortgage Rates Fall to Five-Month Low, Freddie Mac Says (businessweek.com)