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Making the Decision to Buy a Home

By Steven Roberts Updated on 11/20/2013

Pros and Cons to Buying a HomeBecoming a homeowner has without question been glamorized as the American dream. To make reality of this dream, you will endure risk, sacrifice and commitment. Keep your head up, only through risk will you receive the most reward. Before making this life changing decision, let us first illustrate the advantages and disadvantages, then we will consider the implications of homeownership against your dreams for the future.

Pros of Homeownership

  • Building Equity: Finances will fluctuate, including your income and debt. To acquire wealth, you will need to gain equity in your assets. Your equity is the financial worth you have invested into tangible property that can be sold or liquidated for cash if needed. As the price of your home appreciates, your equity will grow as well. 
  • Tax Benefits: Homeowners are eligible for a significant deduction in Federal and State income taxes. You may deduct the amount of mortgage interest and property taxes paid yearly. This could potentially move you into a lower tax bracket and contribute to higher tax returns.
  • Retirement Savings: Home-ownership will provide great incentive for retirement savings. You may also supplement social security income by requesting monthly income from the equity you have grown. Most important, you will have eliminated paying mortgage or rent upon retirement, which will alleviate thousands each month for leisure and health.

Cons of Homeownership

  • Fluctuation in Market Value: Property values fluctuate on a continuous basis. The financial stability of our economy and housing market drive home prices and interest rates. The basic laws of economics imply that supply must meet demand, subsequently dropping the value of your home when homebuyers alike are struggling financially. The value of your home is also dependent upon the location of your home and its favorability, safety, convenience and climate.
  • Short Term vs Long Term: The first 5 years of homeownership will cost you significantly more than renting. This should come as no surprise considering the risk and reward associated with borrowing a large sum of money. The long-term investment will become very rewarding after the 5 year mark, as you have accrued equity and may sell the home at a higher value. The higher upfront cost is due to mortgage payments, upfront insurance premiums, lender/ broker fees, home improvements and the down payment. 
  • Risk of Foreclosure: Upon borrowing a home loan, you have signed a contract that has made you responsible, regardless of your current circumstances. Keep in mind that unemployment and financial distasters are common upon American homeowners and it is always a possibility. To prevent such measures, you must live within your means and prepare a savings for such unfortunate events. There are options if you default, so do not let this fact discourage you.

Are You Prepared to Buy a Home?

Begin by considering your intended goals for the next 5, 10 and 15 years. Next take the time to gather documentation of your finances and create a detailed budget of your income, debt and monthly spending. Once you are locked in to your home, you will lose the ability to easily relocate and the cash necessary for travel, a luxurious wedding, that new car and you might even have to postpone plans for a new baby. Take the time to think of the following questions and evaluate if now is the right time to buy.

Do you have a significant amount of debt?

Debt is a financial obligation that lenders evaluate and it will be evaluated against your monthly income. A high debt-to-income ratio may disqualify you upon the application process, because you were deemed to high of risk to repay the loan ammount. That debt will also hold you back from maintaining the necessary disposable income for future purchases and living comfortably, while satisfying your mortgage payments, insurance, utilities, maintenance and taxes.

Do you plan to live in this home for more than 5 years?

As discussed, this is a long-term investment that will be very rewarding after the 5 year mark. If you are consider selling the home to relocate, you will take a loss on the upfront insurance cost, cash down payment and potential profitability from appreciation in the home's market value. You will be financially obligated to live in this city, where as renting is typically no more than a 1 year contract. 

How good is your credit score?

Your interest rate is the cost of lending you this long-term loan. This interest rate is based upon the length of time you select for repayment and more importantly, your FICO credit score. As you know, the credit score is a value of your trustworthyness regarding responsible repayment of debt. A higher credit score will always bring down the interest rate you pay each month. Scores above 740 will receive the most advantageous interest rates available. Scores between 630 to 720 will receive reasonably affordable interest rates. Scores below 630 towards 580 are considered poor and reflect a bad track record of irresponsible debt repayment. It may be best to improve your score, which could take as little as a few months, before applying for a locked in rate for 15 to 30 years. 

How much money have you saved?

The most desirable ammount for a down payment on your home is 20% of the mortgage loan. This means you will own 20% equity in your home, decreasing the overall risk that you may default on your loan. The minimum down payment is 3.5% - 5% for FHA (government insured) loan and conventional loans. As you only physically own 3-5% of the home, you are liable for another cost in addition to the interest, called mortgage insurance. This may require an upfront insurance cost as well. Depending on the loan, you may purchase private mortgage insurance or mortgage insurance premiums. 

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About The Author:
Steven Roberts
Steven Roberts is an editor for Lender411. He specializes in mortgage and finance. Steven graduated from Cal State Long Beach. Contact him at Steven@Lender411com.

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