Saturday, December 16

Buying a Home – Invest in Your Financial Future

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One of the primary objectives of nearly every American family is to own their home. People save and prepare for years to bring this dream to reality. Why is homeownership such a compelling ambition? The reasons are numerous including pride of ownership, a sense of worth or well-being, or the desire to establish “roots” in the home environment. For many Americans the most compelling motivation is the “investment opportunity.”

Is investing in a home a secure investment? Not necessarily, no investment is absolutely secure, but if you buy within close proximity to a growing city or major a metropolitan area, the odds are greatly in your favor that over time your home will appreciate in value. The recent downturn in real estate values has seriously damaged the financial well being of many Americans and consequently their confidence in real estate as an investment vehicle. We have had these downturns before but never as severe as the current one. There is no point in belaboring the many mistakes that led to this debacle but hopefully they won’t be repeated. Is this a good time to buy? There are differing opinions but to some extent, it depends on where you live. Homes in some locations have recently begun to show increased sales prices while other locations may be years away from any significant recovery. As they say “timing is everything”. Even with the downturns, appreciation in real estate has been substantial over the years. Although there are many economic contributors, appreciation in home values is governed by two primary factors; inflation and supply and demand.

Inflation– It only takes a close look at your checkbook to realize that the cost of goods and services continues to escalate. As the cost of labor and materials increases, so does the cost of building a house. Just the various manufactured products that are included in the building of a home seem endless.

Supply and demand – In a growing market the demand for conveniently located housing is likely to exceed the supply. Our population continues to grow but we cannot create more land on which to build. As a result, competition for properties with reasonable access to employment centers, shopping, and entertainment drive housing prices to higher levels.

Over time, as you watch the value of your home increase through appreciation, the equity in your home is compounding because you are simultaneously reducing your mortgage balance. As time goes by, you may be surprised at how much this forced saving account has increased in value. Lets’ move on to the immediate advantages of buying verses continuing to rent.

One of the primary objectives of nearly every American family is to own their home. People save and prepare for years to bring this dream to reality. Why is homeownership such a compelling ambition? The reasons are numerous including pride of ownership, a sense of worth or well-being, or the desire to establish “roots” in the home environment. For many Americans the most compelling motivation is the “investment opportunity.”

There are several advantages in investing in real estate compared to other traditional investments. To start with, you are purchasing an appreciating asset using other people’s money. Leveraging the real estate investment through a mortgage provides a maximum “return on invested dollar”. Borrowing money to invest in stocks may not be logical due to the possibility of taking a total loss. Your home and the land it is built on will always have value consequently there is always the prospect of recovering lost equity. As an example, Lets’ say you finance 95% of the purchase price with a FHA insured mortgage. With a down payment of 5% and assuming closing costs of 2% on a home purchase of $250,000, your total cash initial investment will be 7% or $17,500. If your home appreciates 6% ($15,000), you realize an 86% return on your investment. If your home appreciates 6% during the second year, the gain will be on $265,000 or $15,900 increasing the value to $280,900. In other words, your appreciation is compounding. The return on your initial investment after the second year would be a whopping 176%. Each month you make a payment toward the principal and interest but if you continue to rent, you are contributing a similar amount to your landlord’s future. The clincher for most homebuyers is that unlike other investments, mortgage interest, taxes and certain closing costs are tax deductible if the property is your primary residence. The above example requires a monthly payment in the neighborhood of $2000.00 but is reduced to $1450.00 after your interest and tax deduction if you are in the 28% tax bracket. If cash flow is an issue and you are a salaried employee, you can increase your take home pay by claiming additional exemptions. This is a compelling motivation to buy rather than rent but be prepared for the “long haul”. In most locations and in today’s real estate environment, 6% appreciation may not be an immediate reality but historically, even considering the downturns, inflation and demand has fostered appreciation rates well above 6% on well located properties in growing metropolitan areas.

Home ownership is not an exclusive club. You may be surprised at how easy it is to get in and how affordable it can be. Rents are almost certain to escalate in the future but when buying a home financed with a 30 year fixed rate loan, payments are constant. Only the real estate tax and homeowner insurance can increase. Interest rates are at their lowest level in forty years. Low interest rates along with reasonable property values have created an exceptionally fluid buying environment making owning a home more affordable than ever before.

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