Is Buying a Home the Right Move for You?
The Best Investment
As a fairly general rule, homes can appreciate about four or five percent a year. Some years will be more, some less. The figure will vary from neighborhood to neighborhood, and region to region. Kate can give you an estimate of what homes are appreciating at in neighborhoods of the Douglas County and Denver Metro areas.
Five percent may not seem like that much at first. Stocks (at times) appreciate much more, and you could easily earn over or the same return with a very safe investment in treasury bills or bonds.
But take a second look…
Presumably, if you bought a $200,000 house, you did not pay cash for the home. You got a mortgage. Suppose you put as much as twenty percent down – that would be an investment of $40,000.
Here is an example: At an appreciation rate of 5% annually, a $200,000 home may increase in value $10,000 during the first year. That means you earned $10,000 with an investment of $40,000. Your annual "return on your investment" would be twenty-five percent.
Of course, you are making mortgage payments and paying property taxes, along with a couple of other costs. However, since the interest on your mortgage and your property taxes are both tax deductible, the government is essentially subsidizing your home purchase.
Your rate of return when buying a home is higher than most any other investment you could make.
Forced Savings
Some people are just lousy at saving money, and a house is an automatic savings account. You accumulate savings in two ways. Every month, a portion of your payment goes toward the principal. Admittedly, in the early years of the mortgage, this is not much. Over time, however, it accelerates.
Second, your home appreciates. Average appreciation on a home is approximately five percent, though it will vary from year to year, and in some years may even depreciate.. Over time, history has shown that owning a home is one of the very best financial investments.
Stable Monthly Housing Costs
When you rent a place to live, you can certainly expect your rent to increase each year – or even more often. If you get a fixed rate mortgage when you buy a home, you have the same monthly payment amount for thirty years. Even if you get an adjustable rate mortgage, your payment will stay within a certain range for the entire life of the mortgage. Be sure you will be able to afford whatever cap you may have on your adjustable rate to avoid foreclosure down the road. – and interest rates aren’t as volatile now as they were in the late seventies and early eighties. See our take on foreclosure.
Imagine how much rent might be ten, fifteen, or even thirty years from now? Which makes more sense? |