A Guide to Buying Your First Home
Step 1 - Deciding Whether or Not to Buy
The perception of owning a home has changed significantly in the last 60 years. When real estate agents sold houses in the 1950s, they usually focused on the “Home for Life” sales pitch where the home you bought would one day pass to your children, and their children, and so on. By the 1970s, homes were considered leveraging tools for loans. By the 1980s, you house was an investment. Now, your personal living space is alternately seen as a source of low interest loans and a mountain of useful, but still massive, debt that you have to tunnel through.
Family Home or Your Biggest Investment?
Whether your home is an investment or not depends on how fast and loose your definition of investing is. Homes generally appreciate in value as do investments, but they are also, in most cases, purchased by borrowing 80% or more of the property's value. Also, unlike a stock or bond, houses require infusions of capital for upkeep and maintenance. People often forget the thousands of dollars they put into a home when they talk about the thousands they made selling it. Still, you have to lay your head somewhere to sleep.
There is the indisputable fact that a house provides financial leverage. Instead of having his or her financing options limited to the bank, family and friends, a collection of credit cards, or a mafia loan shark (marginally worse than the credit cards), a homeowner has a whole new scope of lower interest credit to access – including the increasingly popular home equity loan. You can use your home to send your children to college or start up your business, but it is still borrowing. One of the best uses of a home is to help you retire. By selling your house and moving into a smaller home (or even shared accommodation like a condominium to save back-breaking maintenance), you can use the freed up capital to supplement your retirement income.
To Rent or Buy?
The above reasons, the fact that you need to live somewhere and that owning a home provides financial leverage, doesn’t mean that buying a home is the best decision in all cases. Buying a home is expensive. There are fees, loan costs, title insurance, moving costs, agent commissions, mortgage insurance, renovations, and so on. Selling a home comes with a similar collection of expenses. If you’re not going to be staying put for long enough to allow your house to appreciate, you will likely take an overall loss on the deal. It is said that renting is akin to throwing money in the garbage, but the same is true for buying short-term.
Short-term is pretty subjective when speaking about housing. Some areas might see double digit appreciation every year, making your expenses back plus some even if you only live there for one year; some areas may be stagnant or dropping even after 10 years. As a general rule, however, you shouldn’t purchase a home unless you plan on staying put for at least 3-4 years. That should be a long enough timeframe for the general appreciation in real estate to yield 15% - the approximate minimum return that you need to break even with your purchase and sale costs. Again, this is taking an average 5% appreciation a year, something that isn’t guaranteed even if the historical sales data for your prospective neighborhood shows consistent growth – the 2007 credit crunch has devalued homes in many previously consistent communities.
Financial disasters aside, the further you are from a full three or four years, the less likely it is that your home will see enough appreciation. If you can’t see yourself staying in the same place for long, renting is a better option as far as both stress and finance go.
Making the Decision to Buy
Deciding whether you should buy home or not depends on how long you plan on living in a particular area. With the exception of people looking to invest in real estate, your first question should be: am I ready to stay in one place for the next three or four years? A home ties you to a particular area in a way that renting doesn’t – events in that area affect the value of your home in a direct way. If you have a stable job and are prepared to settle in one area, then homeownership is probably for you. In the next article we will look at securing financing and what to do with your down payment.
