The Reason to Buy Instead of Renting
In talking with first-time potential home buyers, I find there are a lot of misconceptions about what home buying involves and what benefits home ownership offers so I thought I'd address them in an easy-to-understand way.
One of the things renters tell me is that buying a house seems like a big committment to them. My response is always: it's true, if you don't pay your mortgage, you will be asked to leave your home, but if you don't pay your rent, the same thing will happen.
There are several reasons why it's better to take on the "committment" of a mortgage vs. the committment of a rent payment:
1) Your mortgage payment will never go up. Assuming you get a fixed mortgage (which is the only thing that makes sense right now with interest rates as low as they are) you can count on the same payment every month for the next 15 or 30 years, depending on what term you choose. With a rent payment, you can almost count on the payment increasing every year or two.
2) Your rent payment doesn't help you establish financial security. Your mortgage payment may be the best investment in your future you will ever make. There are 3 ways a mortgage payment helps you build wealth:
a) Through Principle Reduction: When you establish a mortgage (take out a loan) you are borrowing a specific amount of money. Every month, a part of your payment goes towards the principle (the balance of the loan amount) and part of it goes towards the interest on the loan (you agree to borrow the money at a certain percent of interest that you will pay each month.) So, every month, you are REDUCING the amount of the principle of the loan and you owe LESS on the principle every month. Several years into the loan, you have reduced what you owe to the lender, which means that if you decide to sell the house, you keep more of what you get when you sell it than when you started. This is your PROFIT on the sale.
b) Through Appreciation: I'm happy to say that houses are starting, once again, to appreciate in value (their value is going up every month.) People are buying homes again, the number of available homes is going down and because of the principle of supply and demand (where there are more people trying to get something in short supply) the prices go up! When you own a home in an appreciating market, you make money. When you go to sell the home, you make more than what you bought it for. YAY!
c) Through the Mortgage Interest Deduction: As you know so well (unless you work in a cash business) Uncle Sam takes a significant chunk of your paycheck each time you get it. This the joy of having people in Washington working for us, providing us with a safe place to live and clean water etc. However, the folks in Washington have told us that if we do certain things, they will take less of our paycheck. Buying a home is one of those things. They allow us to reduce the amount we owe in taxes by a percentage of how much interest we paid on our home loan. This means we save money in the taxes we pay when we are buying a home over time.
d) Last, but certainly not least, we own a place of our own. A place we can do what we want with, like paint the walls whatever color we choose, or if we want, to even rip out a wall to make a bigger room (make sure it's not a load-bearing wall first though) or change the landscaping around the house. These are things we might not be able to do with a rental. Our home is a place we can live in relative security and can pass on to our kids.
Owning a home is an investment in our future instead of an investment in our landlord's future. Why pay someone else's mortgage when you can invest in your own future? Why make them richer instead of making yourself richer? While buying your first home can be a little overwhelming, most of the time it's just not having all the information that keeps people from doing it. A great real estate agent can help you understand the process, find the right lender and guide you to the perfect starter home. Please give me a call or shoot me an email if you'd like to know more about how to start building wealth through home ownership!