Have you been paying rent for years and wondering what it would be like to have a place to call yours? Owning your own home is one of the best investments you can make to start building wealth. While renting does offer short term flexibility and low maintenance, you are actually helping your landlord pay a mortgage and expenses allowing them to build wealth. Often times you’ll pay more money to rent the same property you could have purchased to achieve a lower monthly payment. Some loans can be approved with a credit score as low as 580 and a 3.5% down payment. When you purchase a home offering a similar monthly payment as you are paying now in rent, a portion of that payment is applied to paying down the principle balance on your own mortgage. This helps you build equity in your home! So essentially a portion of every payment made is being paid back to you.
Here is an example. Let’s say you purchase a home for $250,000 that you live in for 5 years. You initially put down a deposit towards the purchase of 5%, which is equal to $12,500, your equity in the home at the time of purchase. Your amount due to your lender in the form of a mortgage note is $237,500. After the five years, 60 payments later, you decide to sell your home. At this point your note is paid down to approximately $210,000. If your home is worth the exact same amount, your equity will have grown from $12,500, paid at the time of closing, to $40,000!
|If You Pay Monthly Rent Of:||You Will Pay the Same |
Amount for a Home worth:
|With a |
Down Payment of:
|$280,000||20% / $56,000|
|$2,000||$320,000||5% / $16,000|
|$360,000||20% / $72,000|
|$3,000||$480,000||5% / $24,000|
|$550,000||20% / $110,000|
The monthly mortgage payments are calculated based on an amortization schedule, which put simply means that you pay more interest at the beginning of the loan, equal interest and principle at year 15 and increasingly more towards the principle balance each payment for the second half of the 30 year term. Therefore, the longer you own the home, the more quickly you will be able to build equity each month.
While there are always peaks and valleys in property values, historically prices have always increased over prolonged periods of time. By maintaining your home over the years and being strategic about the time you sell, it is very likely the property value will increase, creating additional equity in your home. The same home you purchase now for $250,000 can potentially be worth $280,000 in 10 years, with a remaining balance for the remaining 20 years on your note of $180,500. Leaving you with nearly $100,000 in equity, should you decide to sell at that time. In some cases, property values increase this much in just a few years, however can never be guaranteed. In addition, making one extra payment each year towards the principle balance will reduce your 30 year mortgage by 7 years! So in this case, after 23 years, you will no longer have a mortgage payment AT ALL and will benefit with proceeds equal to the full value of the home anytime you choose to sell after that. This is a huge long term benefit of home ownership., especially in comparison to the amount of rent you will pay over that period of time with zero return in the end.
Unless you are able sell your home yourself for top dollar, you will have to pay a Realtor commission, which is deducted from your proceeds, in addition to a state and municipal tax of approximately 1% combined. This will effect some portion of your proceeds, so the period of time you intend to live in your home as well as projected market conditions, should be a very important factor in whether you choose to continue renting or take the step into home-ownership.
Becoming a homeowner for three years or less may not make sense for you. Unless the market is projected to steadily increase over that time frame or you intend to keep the home as a rental property, you may be at a break even point when you sell. I have had clients purchase homes and sell within 2-3 years and make a profit, however this is not the case for all.
Home improvement projects, if you are willing and able, will add some ‘sweat equity’, similar to contractors who purchase homes to renovate and then sell for a profit. Also, on occasion, there may be some unexpected upgrades, such as replacement of a water heater, furnace or roof, which will usually offer a return on your investment. You want to be prepared for these types of out of pocket expenses. A home inspection is an integral part of the purchase process to understand what upgrades you should expect to make over the time you plan to own the home.
If home-ownership sounds like something you would like to consider and if you have some questions regarding the process and how to get started, let’s set up a time to chat! I work with a lot of first time home buyers and love to help people getting starting in this exciting journey to creating wealth in real estate and having their first place to call their own. Call or email me anytime to get started, I look forward to hearing from you!