Whether we’re dreaming of purchasing our first home or selling and moving up to our dream home, studies show that most people would love to get the keys to a new home. However, many people are scared away from even looking into buying because they fear that it will be too expensive.
I’m not minimizing that it can be intimidating to sign on the dotted line when a lot of zeros are involved. However, I think that you’ll find that buying your dream house is a lot less costly than you anticipate – especially when we factor in the time value of money and the opportunity cost of not buying your dream home now.
Here are six good reasons to back up that assertion:
1. People grossly overestimate the down payment needed to buy.
Of course, for most people, the biggest impediment to buying their dream home is coming up with the down payment needed. However, there’s a clear discrepancy between what most people think they need to put down for a home purchase, and what is actually required.
Perhaps that perception stems from the fact that in decades past, buying a home meant coming up with at least 20% of the purchase price. But these days, most buyers don't stick to those rules, committing only the minimum that their particular loan requires in most cases. In fact, the average down payment on a single-family home purchase is now only 14.8% - and that number is skewed higher by all-cash buyers.
Speaking of loans, many of our home buyer clients are benefiting from mortgage loans that allow them to put less than 20% down, often 10% or even 5%. Likewise, a significant portion of home buyers – particularly first-time buyers or those with marginal credit – may be able to put even less down with FHA loans.
Of course, I’m not a lender, so consult your mortgage broker or ask us for a referral if you’d like more information.
2. Down payment assistance may help lower the cost of buying.
Gone are the pre-real estate crash days when 100% financing was so easily available, and down payment assistance thrived and often made up the difference. But most people don’t realize that there are still great programs, grants, and funds available to assist qualified applicants with their down payment. In fact, there are about 78 million single-family homes and condominiums in the U.S., and 87% of them (68 million homes) could potentially qualify for some sort of down payment assistance program, grant, or other down payment help.
Reportedly, there are more than 2,400 grants, funds, and assistance programs across the country, and 85% of them have funds available for homebuyers at any given time.
Sure, they usually aim to help first-time buyers, lower-income buyers, or folks purchasing modest homes – not exactly your dream mansion. But about 14% of down payment assistance programs are earmarked for individuals that play important roles in our communities, like educators, public servants, healthcare workers, and military veterans.
Down payment assistance programs aren’t just for first-time homebuyers, as 37% of these programs do not require a borrower to be a first-time buyer.
Why not at least ask your mortgage broker about down payment assistance programs since less than 10% of home buyers even apply for a down payment assistance program?
3. Buying is cheaper than the alternative of renting.
Rental demand is hotter than ever in the greater Sacramento area, with little new construction going up for affordable rental units. With a shortage of rental units as well as record-low housing inventory for sale, we’ve seen extreme upward pressure on rental prices. Therefore, waiting to buy your dream house may cost you more if you DON’T purchase now but wait. That logic is sound whether you want to keep renting a house or if you already own a home and are thinking of waiting to sell down the road.
In fact, when we track the monthly allocation of income toward mortgage vs. rent across the country, renting is now twice as expensive as owning a home. (That also means that it’s about half as expensive to be a homeowner than it is to rent.)
And if you think that renting is expensive now in California, economists expect it to keep skyrocketing – particularly in Sacramento, where at least half of all renters pay more than 30% of their income toward rent.
4. Stability saves you money
Some pennywise financial bloggers will tell you to spend within your means when it comes to buying a new house, but what they forge to factor in is the future cost of stability. Consider that every time you move, you have to put your house on the market and sell (paying about 6% to us pesky Realtors), as thousands in other affiliated closing costs; then pay for a moving truck, new furniture, fixing up the new place, etc. By buying the house you truly love and want to be in for the long haul (aka your dream home), you'll avoid paying those selling and moving costs two or three times over the next decades.
5. You’ll probably pay a lot less for taxes.
Owning a home is still one of the best tax breaks you´ll ever find. The government doesn't want to be in the business of housing 300 million+ Americans, so it long ago decided to offer huge tax advantages to promote home ownership and investment. In fact, you can deduct the interest on up to $1.1 million in mortgage indebtedness on your primary home; write-off a lot of repairs and upgrades you make; and sell your primary home for tax free profits up to $250,000 for singles (or $500,000 for married couples) if you’ve lived in the home two of a five years.
Consult your CPA or tax professional for specifics, but he or she will most certainly reinforce that buying your dream home now is a great financial move!
6. Buying now can help fund your savings, net worth, and retirement.
It may feel like purchasing your dream house now is expensive, but two years, five years, and twenty years down the road, you’ll be ecstatic that you made the move. Part of the reason for that future optimism is that statistically, owning a home is the best path to wealth in America.
First off, a study by the Federal Reserve found that median home equity in the U.S. for all homeowners is about $80,000. That means they have a “savings plan” of $80,000 on average (although home values can go up and down and are not liquid - or easy to access). Just as important, the average homeowner keeps $7,300 in liquid cash savings, compared to extremely low savings levels for renters that keep them living month-to-month.
Likewise, statistics show that the average homeowner’s net worth is 34 times that of a renter, and 77% of homeowners say owning real estate helped them achieve their long-term financial goals.
It’s no wonder that 94% of millionaires attribute real estate ownership as a significant part of how they obtained and held their wealth.