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…Through Homeownership
by Tara Hotchkis, Member
FORBES Real Estate Council
Should I purchase a home or sign another lease? Is now the right time to buy, or should I wait until next year? What would be the advantages of buying my next home? These are some of the feelings many of us experience and the questions clients often have regarding the home-buying process. I would answer them with the following seven ways to benefit from taking the plunge into homeownership.
1. Equity building: If you were to trade your monthly rent payment for a mortgage payment, each mortgage payment would build equity in your property. Every rent payment you make to your landlord, on the other hand, creates more wealth for your landlord. Why use your hard-earned money to make your landlord rich instead of building your wealth by investing your money in an asset you own?
2. Hedge against inflation: Are we in an economic upcycle or downturn? We are currently in an inflationary period where money today will be worth less tomorrow. Have you ever stumbled across an old property deed, maybe for your grandmother’s house, and read that only she paid $50,000 for it? Well, $50,000 was worth a lot more in 1960 than it is today. Investing your money in hard assets like real estate can help build your wealth and hedge your money against inflation.
3. Tax savings: Did you know that a homeowner can deduct the mortgage interest on a mortgage loan of up to $750,000? They can also deduct property taxes of up to $10,000 every year. Consult your CPA and ask them for a breakdown of how much money you could save by deducting the interest on your monthly mortgage payment and property taxes on your tax return.
4. Long-term appreciation: Have you ever looked at housing prices from 50 years ago and been shocked by how much they have increased in value? Across the United States, on average, home prices typically double in anywhere from 10 to 20 years. In some markets, home prices increase much more. Here in California, housing prices have increased 120% in the past decade. It’s never too early to buy property, and the sooner you do, the better your chances of securing substantial long-term gains.
5. Fixed monthly payments: As a renter, you have no control over rent increases. As a homeowner, you have the opportunity to obtain a 30-year fixed-rate mortgage loan, meaning you will be able to lock in your monthly mortgage payment for the term.
6. Privacy, control and security: Did you know that if you rent your home, your landlord has the right to enter your home as long as they give you notice? Your landlord is entitled to a key to your property. What if you would like to knock down a wall to bring in more light? You will have to obtain permission from your landlord. You should be able to bring a dog home to a property you pay for, right? Renters must seek permission for this from the landlord. And if your landlord decides to sell the property you’re renting, you could find yourself facing eviction.
Owning your home puts you in the driver’s seat. However, keep in mind that if you own property within a homeowners association, you may also have specific rules to abide by; remember to review your HOA’s bylaws and covenants, conditions and restrictions (CC&Rs) during escrow before removing your contingencies.
7. Take advantage of historically low interest rates: We have seen low rates for so long that the idea of rates increasing may be hard for us to fathom right now. Great credit may even help you secure a mortgage rate below 3%. To put this in perspective, when my parents purchased a home in the 1980s, it wasn’t uncommon to see mortgage rates hover around 18% — can you even imagine? In the early 2000s, when I purchased my first home, I secured a mortgage rate of 6.5% and thought I had scored a bargain. With mortgage rates currently at historic lows, now may be the right time to take advantage of an incredible opportunity.
Many analysts believe mortgage rates will increase toward the end of 2021, into 2022 and beyond. As interest rates rise, so will your monthly mortgage expenses. A 1% or 2% increase may not sound like a lot, but let me give you monthly payment examples of how that increase translates: A $1 million purchase price, with 20% down, will leave you with an $800,000 mortgage loan at 3% resulting in a monthly principal and interest payment of $3,373. If your interest rate increases to 4%, your new monthly principal and interest payment will be $3,819, an increase of $446 per month, and at 5%, you’re looking at paying $4,295 per month, an increase of $922 per month. So the same property could end up costing almost $1,000 more per month by just waiting and not locking in these historic low rates. Reach out to a mortgage professional today and ask them to run your numbers and provide you with a few scenarios to show you how much you could save.
