Owning a house - good investment? My views.
Owning a house is always been a push that the USA has done for decades. Part of it was to expand the market. In 2008, it was apparent that the banking industry was way over-leveraged; giving people loans for up to 105% of the value of their house. When the values came crashing down, so did people's net worth's, many of which were way underwater (meaning they owed more than the property was worth.)
I'm not here to talk about that. Anything with speculation, there's an inherent risk, otherwise everyone would do it. In general, housing prices cannot outpace wages or they will soon become unaffordable and thus a correction in the market will happen.
So assume your house value keeps up with inflation or slightly edges out inflation. Well the cost of buying a home is not free. Typically closing costs are $2000-4000 on a $100k loan. Loans aren't free. If you take a 30 year mortgage out with say only 5% down, you'll have to pay PMI (secondary insurance in case you default) which is just more money out of pocket. Say you borrow $100,000 (just to make the numbers easy) and get a 30 year mortgage at 5% interest. (fair credit). You'll only have a $537 a month mortgage which is a dream in general. You'll have to pay almost the value of the property again over 30 years to buy it ($93,255). Also in the first FIVE years, you'll only have amassed $8,900 in principle. That's not much compared to the $23,000 in interest. That's a LOT of money thrown away, especially if you have to move.
Sure there are tax write offs but you're never getting the interest back. And now you have property tax to deal with as well, they kind of offset to a certain extent. And if your job isn't stable or you have to relocate, you have to start over. So right there you've spent $35k+ that you'll never get back.
During that same period if you would have rented for $500/month you'd be out $30k. Of course I'm using easy numbers, you can in most cases for any large area double those numbers.
WHEN TO BUY!!
You should (IMO) only start considering owning a home when you have met these criteria:
You can afford a house with a simple gross income calculator. Most sites say no more than 36% of your gross which to me is too much IMO, I'd use no more than 25% of your gross as an estimate.
You should have good credit. To get the best rates you typically need a credit score of 760 or better. If not, you're going to pay needless interest. If you get a 6% loan instead of a 5% on $100k of borrowed money on a fixed 30 year mortgage, you'll be paying $600/mo instead of $537 and you'll pay another $22k in interest in the life of the loan!
You should have savings. If you're barely making ends meet, then it's not wise to buy if the sudden loss of your job triggers financial panic. You should have 3 months of savings minimum.
You should be career-stable. This isn't easy to quantify. But as long as you have a job and earning potential and the ability to find another similiar job, then that's key. If you're with a company that may relocate you, buying isn't a very good option.
Also there is MAINTENANCE. Houses don't come with warranties. My house is very modest. It was built in 1959 and has issues. Over the course of 13 years I have installed new drain tile and a sump pump indoors to get the basement leak-proofed = $8800 after drywall damage and water seepage of $2k. New windows = $13k, New gutters = $1k, redone bathroom, $2k, New roof soon, and probably will want to add vinyl siding which is another $5-6k. And these aren't "emergencies." If I have the sewer line break, that's $7k, any plumbing issues could be a couple grand, along with replacement appliances like the washer/dryer, and fridge. I'm not including all the minor things I've had to fix over the years, like plugged pipes, broken furnace, etc.
So is this sounding that great? It's nice having my own space, but budget at least $400 a month for repairs that will need to occur.
Renting, you have none of these unexpected costs. Of course, if you can buy a house outright, that's the best, but who has a spare $200k laying around? Not many of us do.
The nice thing is that you are building equity and getting tax breaks. However, it comes at a cost. I've had to take out a $12k home equity loan before and it isn't fun. Of course, property is better than buying a car which has no payback ever.
If I was to do it over, I would have either rented for 3 years or moved in with my parents to save up. I bought a house back when my income was fairly low, so I stretched a bit to make ends meet. Now, I feel I'm stuck for a while as I'm about halfway through my mortgage. If I had waited and saved that money, especially living at home, I would be miles ahead, and probably have my house paid off in full.
Ultimately, that's the goal; not to have to pay rent. However, that's a very long term goal for almost all of us. Be smart with your money and don't rush into something you'll regret later.
Here's a great calculator to help you out!! http://www.realtor.com/mortgage/tools/rent-or-buy-calculator/
I'm not here to talk about that. Anything with speculation, there's an inherent risk, otherwise everyone would do it. In general, housing prices cannot outpace wages or they will soon become unaffordable and thus a correction in the market will happen.
So assume your house value keeps up with inflation or slightly edges out inflation. Well the cost of buying a home is not free. Typically closing costs are $2000-4000 on a $100k loan. Loans aren't free. If you take a 30 year mortgage out with say only 5% down, you'll have to pay PMI (secondary insurance in case you default) which is just more money out of pocket. Say you borrow $100,000 (just to make the numbers easy) and get a 30 year mortgage at 5% interest. (fair credit). You'll only have a $537 a month mortgage which is a dream in general. You'll have to pay almost the value of the property again over 30 years to buy it ($93,255). Also in the first FIVE years, you'll only have amassed $8,900 in principle. That's not much compared to the $23,000 in interest. That's a LOT of money thrown away, especially if you have to move.
Sure there are tax write offs but you're never getting the interest back. And now you have property tax to deal with as well, they kind of offset to a certain extent. And if your job isn't stable or you have to relocate, you have to start over. So right there you've spent $35k+ that you'll never get back.
During that same period if you would have rented for $500/month you'd be out $30k. Of course I'm using easy numbers, you can in most cases for any large area double those numbers.
WHEN TO BUY!!
You should (IMO) only start considering owning a home when you have met these criteria:
You can afford a house with a simple gross income calculator. Most sites say no more than 36% of your gross which to me is too much IMO, I'd use no more than 25% of your gross as an estimate.
You should have good credit. To get the best rates you typically need a credit score of 760 or better. If not, you're going to pay needless interest. If you get a 6% loan instead of a 5% on $100k of borrowed money on a fixed 30 year mortgage, you'll be paying $600/mo instead of $537 and you'll pay another $22k in interest in the life of the loan!
You should have savings. If you're barely making ends meet, then it's not wise to buy if the sudden loss of your job triggers financial panic. You should have 3 months of savings minimum.
You should be career-stable. This isn't easy to quantify. But as long as you have a job and earning potential and the ability to find another similiar job, then that's key. If you're with a company that may relocate you, buying isn't a very good option.
Also there is MAINTENANCE. Houses don't come with warranties. My house is very modest. It was built in 1959 and has issues. Over the course of 13 years I have installed new drain tile and a sump pump indoors to get the basement leak-proofed = $8800 after drywall damage and water seepage of $2k. New windows = $13k, New gutters = $1k, redone bathroom, $2k, New roof soon, and probably will want to add vinyl siding which is another $5-6k. And these aren't "emergencies." If I have the sewer line break, that's $7k, any plumbing issues could be a couple grand, along with replacement appliances like the washer/dryer, and fridge. I'm not including all the minor things I've had to fix over the years, like plugged pipes, broken furnace, etc.
So is this sounding that great? It's nice having my own space, but budget at least $400 a month for repairs that will need to occur.
Renting, you have none of these unexpected costs. Of course, if you can buy a house outright, that's the best, but who has a spare $200k laying around? Not many of us do.
The nice thing is that you are building equity and getting tax breaks. However, it comes at a cost. I've had to take out a $12k home equity loan before and it isn't fun. Of course, property is better than buying a car which has no payback ever.
If I was to do it over, I would have either rented for 3 years or moved in with my parents to save up. I bought a house back when my income was fairly low, so I stretched a bit to make ends meet. Now, I feel I'm stuck for a while as I'm about halfway through my mortgage. If I had waited and saved that money, especially living at home, I would be miles ahead, and probably have my house paid off in full.
Ultimately, that's the goal; not to have to pay rent. However, that's a very long term goal for almost all of us. Be smart with your money and don't rush into something you'll regret later.
Here's a great calculator to help you out!! http://www.realtor.com/mortgage/tools/rent-or-buy-calculator/