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Why You Should Start Planning To Purchase A Home
If you've ever thought about buying a home,
but decided that it was too big a financial gamble, think again.
It's possible you haven't considered the risk of not
buying a home. For the majority of working people, home ownership
is the single most reliable way to achieve financial security.
Without it, you may find it almost impossible to gain access
to the kind of capital you'll need to support yourself in your
later years, pay for your children's education or start a new
business.
Home ownership among young Americans has dropped
alarmingly in recent years. In 1980, 52 percent of all 25 to
34 year-olds owned a home. By 1990, only 45 percent did, and
among 34 to 44 year-olds, home ownership had dropped from 71 percent
to 66 percent. According to Katherine S. Newman, author of
Declining
Fortunes: The Withering of the American Dream
(Basic Books), those who don't get into the
housing market by a certain age may
have made "a misstep that will dog their heels for the rest
of their lives." The primary reason for the decline in ownership
among the young is cost. The price of housing more than doubled
between 1975 and 1985, and mortgage interest rates skyrocketed.
Fortunately, the pendulum has swung back.
Since 1991, overall housing prices have remained stable, though
in some areas of the country they have fallen by as much as 25
to 30 percent, and mortgage interest rates have dropped dramatically.
But if, like many young people, you grew up in an overheated
housing market, you may continue to think of home ownership as
something beyond your reach. Here's why that attitude could be
a big mistake.
1. You may wait a long time to see rates this good again.
Suzanne recently saw a house selling for $125,000. She has $20,000 in savings
to use as a down payment; a $105,000 30-year mortgage at 7.5 percent
would cost her $733 a month, and she might have another $150 a
month in real estate taxes, for a total of $883.
Suzanne is hesitating: $883 feels like a stretch
for her now, since she's paying only $650 for her rental. But
if she waits, and prices and mortgage rates rebound to the levels
of five years ago, the exact same home might cost her $150,000,
and she could be paying a 9 percent interest rate. The bottom
line: She would be stuck with mortgage and tax payments of $1,190
- almost twice
her current rent - for exactly the same
home.
2. Renting deprives you of big tax breaks.
Home ownership is one of the last
remaining tax shelters. In the example above, Suzanne would be
able to deduct about $9,300 in mortgage interest and real estate
taxes on her annual tax return. She earns $30,000 a year, which
puts her in the combined 31 percent federal and state tax bracket.
Therefore, her tax savings could come to about $2,900 a year,
or almost an additional $250 in take-home pay each month. If
she rents, she'll get no tax breaks whatsoever.
3. You need to start small to trade up.
You may feel that there will be
plenty of time to get into the housing market when you feel financially
secure. The problem is, you'll probably need the profit you'll
make by selling your "starter" house to be able to afford
the one that you'll want in the future.
Between 1968 and 1992, the median price of
a single-family home rose an average of 6 percent a year, according
to the National Association of Realtors; over longer periods,
the increase has been between 3 and 4 percent. That's great -
if
you buy early and hang on to your purchase. If you
don't, you'll have to keep up with those increases through other
investments, which is generally difficult to do.
4. Your future is going to be expensive.
Financial experts generally suggest
that to retire, you'll need to build up enough in savings and
investments to generate yearly income of 70 percent of your
pre-retirement income. That's a tall order - and a reason
to start amassing some serious capital soon.
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Equal Housing Lender
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