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Buying a first home can be an intimidating process. But the
first step is making those first decisions: I want to own my
own home; I can afford to own my own home; owning my own home
makes sense for me financially and emotionally. If you are
still struggling with those first decisions, here are some
facts that might help you make the first step towards becoming
a homeowner. You Can't
Afford NOT to Buy A Home!
Over the last ten years, the cost of rental housing in the
U.S. has increased an average of 3 percent per year. That
means that an apartment or home renting for $1,000 per month
will cost more than $1,300 a month in ten years, the total
amount you would pay for rent will equal $137,567!
Tax Advantages of Owning
a Home Result in Savings
None of that $137,567 is returned to you, either through
savings or as an investment. Homeownership, on the other hand,
has tax advantages over renting a home, and those advantages
can help you save money. Unlike your monthly rent' part of
your monthly mortgage payment "comes back to you" in tax
savings. Here's an example: You purchase a home that
costs $210,000. Your down payment is $10,000 (plus closing
costs-expenses incurred to actually process the transaction).
You finance the balance with a 30-year fixed rate mortgage at
6.5 percent interest. Your monthly payment (not including
utilities, maintenance, insurance, etc.) are:
| MONTHLY MORTGAGE
& TAX PAYMENTS |
|
| mortgage |
$1,264 |
| property tax
(@1.25 tax rate*) |
230 |
| Total Monthly Payment |
$1,494 |
| tax saving per month (assuming a 30%
income bracket) |
| mortgage interest tax
deduction |
$ 322 |
| tax deduction for property
tax |
68 |
| Total Monthly Tax Saving |
$ 390 |
| Total Monthly Cost After Tax
Savings |
$1,104 |
*property tax rates vary by city and
county
You actually save $390 a month by owning your own home. On
a yearly basis, the savings is even more dramatic:
| Total Annual
Costs |
Homeowner |
Renter |
| annual mortgage/rental payment |
$15,168 |
$12,000 |
| real estate taxes |
2,760 |
0 |
| mortgage interest tax deduction |
-3,864 |
0 |
| tax deduction for property tax |
-816 |
0 |
| mortgage principal accumulation |
-2,232 |
0 |
| appreciation* |
-9,450 |
0 |
| Total Annual Cost |
$1,566 |
$12,000 |
*Based on 4.5% annual appreciation rate,
from the NATIONAL ASSOCIATION OF REALTOR®
Median Sales Price data series
Homeownership is a Good Investment
For the majority of Americans,
their home is their largest financial asset and a major player
in their investment portfolio. It's a good thing, too, since
stock market value has declined since 1988, while home price
appreciation has increased. The NATIONAL ASSOCIATION OF
REALTORS® estimates that home value rises, on average, by 4.5
percent a year. That's a steady return on investment; one's
own home is a much less volatile asset than stocks, bonds or
mutual funds.
As an example, let's look again at that $210,000 home. Unlike
your rental unit, your home should appreciate over time.
Assuming a 4.5 percent appreciation rate*, your home will be
worth $219,450 in the second year of ownership., $229,325 in
the third year of your owning it etc. After ten years, your
$210,000 home will be worth $312,080. Not only do you earn a
rate of return on your original purchase price, but you also
get a return on any subsequent appreciation.
*Average price appreciation from 1970-2005
was 6.7%
Homeownership Builds Wealth for Households
The Federal Reserve Bank
estimates that homeowners have a net worth almost 36 times
more than that of renters. In 2004, the median net worth for
homeowners was $184,400 compared to $4,000 for renters. How do
you build up your net worth? Through those "appreciating
returns" on your home.
We've already seen how your
$210,000 home is worth $312,080 in ten years. In addition, you
are paying down the principal on your mortgage. Remember that
$200,000 you borrowed at 6.5 percent over 30 years 0 that debt
amount is decreasing every month and every year.
| Year |
Home Price |
Mortgage Debt |
Net Worth |
| 1 |
$210,000 |
$200,000 |
$10,000 |
| 2 |
219,450 |
197,765 |
21,685 |
| 3 |
229,325 |
195,379 |
33,946 |
| 4 |
239,645 |
192,834 |
46,810 |
| 5 |
250,429 |
190,119 |
60,310 |
| 6 |
261,698 |
187,222 |
74,476 |
| 7 |
273,475 |
184,131 |
89,344 |
| 8 |
285,781 |
180,832 |
104.948 |
| 9 |
298,641 |
177,313 |
121,328 |
| 10 |
312,080 |
173,559 |
138,521 |
After the first year, you now only owe $197,765 on a home
that is worth $219,450. You have "netted" a $9,450 increase in
the value of your home, plus $2,235 a year that previously you
owned as part of your mortgage debt. As you debt decreases and
the home value increases, you accumulate wealth from the value
of your home. In addition, over this ten-year period, you will
have significantly lower after-tax payment for housing. Each
year as your home appreciates and your continue to pay down
your mortgage debt, you increase your own net worth.
Homeownership - It's NOT
Just About Money
The "numbers tell the story" should ease your mind about
the financial aspects of becoming a homeowner. But there are
other, less monetary, benefits to homeownership. Several
research studies indicate homeownership adds to the value of
communities, has positive effects on children, and even
contributes to increased voter participation rates.
Homeownership: The American Dream
More that two thirds of American households own their own
home. They know the benefits of homeownership, form the
accumulation of home equity, tax incentives, and the pride of
owning a place of their own. They also had to take that first
step of deciding "I'm ready to be a homeowner."
We would be happy to guide you to first-time homebuyer
programs in our area, as well as assist you in searching for
and buying your next home!! |
