Should I buy a home, or wait? That is the question many people ask themselves when they are deciding whether to purchase a property. A home can be a great investment, but it can also be a huge money pit if you rush into a purchasing decision without a proper assessment of your circumstances.
What are the benefits and drawbacks?
Before deciding on whether to buy a home, you should deeply consider the benefits and drawbacks of owning property. In this blog post, we will discuss both sides of the coin so that you can make an informed decision about what is best for your own personal situation.
Why you should buy a home:
The pride of ownership:
Many people purchase a home because they want to feel proud. They enjoy the feeling of knowing that their hard work has paid off. They should be proud of what they have accomplished. There is also a sense of pride in being your own landlord and not having to ask someone else for approval of your decisions.
The value of home appreciation:
Home values are known to generally increase over time. The increase of home equity over time can potentially be a very lucrative investment and help to serve other financial goals you may have, like a retirement fund. “Housing values in general increase over time, they appreciate,” states Mel Blumenthal, Vice President of the Hopman Group. “You’re building equity in a house that is an appreciating asset for the future.” An impressive resource to help you anticipate appreciation is the FHFA’s House Price Index tool. Here, you can track the history of home values in your specific neighborhood.
Mortgage Interest Reduction:
In some circumstances, you may be able to utilize your home as a tax shelter, as tax rates tend to favor homeowners. To fully leverage the interest and property tax deduction, you will need to itemize your deductions. By keeping your mortgage balance below what you paid for your home, your mortgage interest is entirely deductible on your tax form. Homeowners can also deduct some of their property taxes, so it’s important to verify which ones are deductible and to keep an accurate record. To learn more on this, IRS Publication 530 can help new homeowners understand these options.
Capital Gains Exclusion:
If you live in your home for a minimum of two out of the last five when you sell it, homeowners typically can exclude up to $250,000 from their taxable income or $500,000 for a married couple of the profit from capital gains. You are not required to purchase a new home or upgrade afterward.
Why you should not buy a home:
Not having a down payment:
If you don’t have a substantial sum of money saved up for your down payment, it will be difficult to borrow enough from the bank. The down payment is typically 20% of the purchase price. But you may qualify for a VA or FHA loan. You can get an FHA loan with as little as 3.5 % down and there are loans for first-time homebuyers with 0% down. Anything less than 20% will require you to get private mortgage insurance. This will be added to your monthly payment. If you are not currently in the position to put an appropriate down payment on a home, Mel stresses the importance of saving. “Make an automatic deduction from your checking account into your savings account before you even have a chance to spend the money. Shift that habit. While having a larger down payment can provide many benefits, I never want to encourage folks to sacrifice their emergency savings to put more down on a home. You can end up in a bind when repairs or unexpected home maintenance expenses arise.”
Low credit score:
If you have a low credit score, it will be difficult to qualify for the best rates. A low credit score can also make getting approved for a home difficult. If your score is under 620, it is rare that you will be eligible for a loan, but not impossible. It would be in anyone’s best interest to work on getting their credit score up before applying for a home loan to qualify for the best rates.
High debt-to-income ratio:
Your debt-to-income ratio is calculated by dividing your total monthly debt and expenses by your gross monthly income. When your monthly debt to income ratio is above 43%, you will have a hard time qualifying for the best loan rates. “If somebody’s monthly gross income is $4,000, you multiply that number by 43%, you get $1,720. This is the total that somebody should be spending on debt payments,” shares Mel Blumenthal. “If you already have monthly obligations of credit cards, car loans, student loan payments—and all of that totals up to $500, that means you should be spending $1,220 dollars, additionally, for your mortgage, because your total debt should only be 43% of monthly income.”
Don’t Forget to Save for the Unexpected
It will be hard to save monthly money for home repairs and maintenance if you have a high debt-to-income ratio. Putting money aside for home emergencies is one of the most important factors that many people forget to add in when figuring out what they can afford. Therefore, when considering how much one can “afford” in a mortgage, it’s really important to factor in the inevitable upkeep of a house.
Uncertainty about the future of a job:
If you are not certain that your job will still be around months down the road, it may not be the best time to look into buying a home. Foreclosure listings are filled with people who have found themselves in this situation. Ask yourself, am I happy in my current role? Do I think my current position at my company is stable? Genuine answers to these questions can give some direction towards your consideration of purchasing a home at this time.
As you can see, there are many reasons to buy a home. There are some reasons to steer away from the decision as well. Homeownership is a wealth-generating tool that can provide tax benefits. But you need to have a favorable debt to income ratio and financial means to support the process. If you are considering buying a home, it is important to weigh the pros and cons. Then you can decide if this is something that will work for your personal situation.
For more assistance on understanding if homeownership is right for you, please feel free to give The Hopman Group a call.
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