WEALTH BUILDING BEGINS WITH HOME OWNERSHIP
Buying your first home is exciting. It takes planning and sacrifice to get to the point of purchase, but once those little brass keys are in your hand, you’ll feel proud of your achievement and begin the important process of wealth building.
It may be hard to believe but the pandemic has made this the perfect time to buy. Interest rates are at a historic 3% to 3.5%! Home prices have inched up because supply is low and demand is high, but the low interest rate more than compensates. Predicting the future is tough, but we can safely assume home prices are not going to drop and that interest rates will eventually climb back up. So I encourage anyone thinking about home ownership to get serious now. This is a golden opportunity to make the great American dream of home ownership your reality.
If you are a renter, you may have noticed an increase in your rent over the past year. According to Bankrate, the national median rent for a one-bedroom apartment rose 4.1 percent in 2019 for an average out of pocket cost of $1,078. Rent is and always will be an unpredictable expense in your life whereas a fixed rate mortgage payment stays exactly the same for the entire length of the loan (typically 30 years). Being able to budget long term means money in your savings or 401K.
Typically the cost of a monthly mortgage payment is comparable to rent payments. So the probability of qualifying for a home loan may be greater than you think. Qualifying for a home loan factors in more than just your salary. You will typically need to bring at least some money to the table. For a conventional loan you can expect to pay a deposit of 5% of the home price plus 3% for closing costs. With the high cost of homes in some areas that can seem like an impossible goal. However, keep in mind that besides FHA (low down payment) and VA (no down payment) loans there are many county, state and federal programs to help low income and first time buyers make the leap into home ownership. Don’t assume you are NOT a first time buyer if you have previously owned a home. The definition of “first time” varies by state and program. For example if you recently got divorced and owned your last home with a spouse you may qualify as “first time buyer”. Google “home loan programs” and you’ll be surprised at the opportunities.
The best place to start is with a lender you trust. Choose a lender with whom you can discuss your entire financial picture. While there is a place for on-line lending operations such as Quicken Loans, the fail rate is high and these are not suitable for first time buyers. You can ask a trusted Realtor to refer you to a lender he or she trusts. If your lender determines that you are not ready now, he or she can help you create a game plan to ready your credit score and save the cash you’ll need. Many young people and those who have had a life set back such as divorce, bankruptcy or financial mismanagement end up moving back in with family to save the down payment. The important thing is to work hard towards the goal of home ownership. It is the essential road to wealth building. Life and life-lessons happen to all of us. Don’t let that discourage you, buck up, make a plan and stick to it. My very favorite buyers are the ones I help get into a home after they have worked hard and sacrificed to overcome mistakes or other tough situations. You can do it.
Remember buying a home is a pathway to financial wealth. When you pay rent, you pay someone else’s mortgage down. When you have a mortgage, every monthly payment adds equity to your property so you are effectively paying yourself to live someplace. Being able to paint, renovate or improve your own home is part of the fun of home ownership, but home ownership is also the beginning of long term wealth. People who own their homes have more borrowing power for children’s college tuition, co-signing for children’s vehicle loans (the beginning of their credit building), funds for emergencies, funds to make additional investments, and finally assets to leave to the next generation. To be clear, you can carefully leverage your equity and you can squander it. I am never going to advocate the latter.
Leveraging your equity could mean “buying up”. Once you have accumulated enough equity in your home through mortgage payments or appreciation, you can use that money as a down payment on a more expensive home. Over the course of your life you can expect to own three or more homes. Your starter home is the one that gets the ball rolling. It is more important to select this home for its investment value over the features you want. Your goal is to grow equity on the first one so you can buy up as your life changes. At a certain point you may want to buy a less costly home, typically paying cash for the home, and use the rest of the equity you have built over the years for retirement money. Not only will you build your own wealth, but homeowners are significantly more likely to leave money for the next generation. This is why families with money have it generation after generation. That is what it means to build wealth through your real estate. Rent will never provide retirement money, a place to live without paying anything each month or a valuable leg up for future generations.
Owning a home builds wealth over the course of your life, but don’t put all your eggs in one basket. Real estate is an excellent way to build wealth, but you should not buy a house up to the limit of your income. You still need to be able to save for rainy days and for your long term future. Every area is different, but I strongly recommend a single family home over a townhome or condo. That said, I’d rather put my client in a townhome in a better area than a single family in a marginal area. An area that is on the upswing can be a good investment. Always check the rating of the local schools, even if you don’t have children, to get a take on the home values. This is only an indicator not conclusive. An area’s proximity to a major job market can also grow the home value over time. Another nifty idea is to buy a home with a rentable space such as a walk out basement that is finished with a kitchenette (or in which you can add one). You can also consider renting out a room or even setting up an Airbnb in your home for extra benefit to home ownership. You really want to punch up the money you make from the first purchase. This sets you up for the next three to four homes you will buy and eventually the capitalization you will reap.
Don’t wait. Contact a Realtor or lender today and get a snapshot of your financials so you know if you can buy now or begin the saving process so you can start the important goal of wealth building. Will it be easy, nope, but with self-discipline and a little rewarding sacrifice you can absolutely do this!!