Do You Know The RISKS & REWARDS of Buying a Home?

 

We all know that every financial decision has its rewards and its risks. The purchase of a home is no different. The wise course to take in these decisions is to weigh the rewards against the risks. Naturally, you want to maximize the advantages and minimize the disadvantages.

So, how do you do that? It calls for objectivity on your part!

Normally, you’d have to do some research to find out the risks and rewards of home buying. But I’ve already done that for you below! Read on to see if you're a good candidate for owning a home!

Rewards

Everybody receives an "intangible" benefit when they buy a property - the joy of owning it and creating a home for your family. But, there are also several objective financial rewards that can be earned through home ownership! 

First, there’s appreciation. On a long-term historical basis, your home is generally worth more when you sell it than when you bought it. A home purchase is a wonderful financial investment over time.

A second benefit: Financial flexibility! This benefit is a result of appreciation. Here’s how it works: When your home appreciates, this means you can sell it at a higher price. Then, you can use the profit to buy a bigger and better home…tap into the equity (what your home would sell for minus what you owe on the mortgage)…pay college tuition for the kids…use it to fund your retirement…or any other goals you have in mind!

The third benefit: leverage. Buying a home allows you to use borrowed money (the mortgage) to profit on later price increases (appreciation) on property you haven't paid for.

The fourth benefit: tax breaks! You can deduct property taxes and mortgage interest and keep up to $500,000 of capital gains!

After reviewing those rewards, you can see that home ownership is nothing less than a wise investment in your future!

Risks

It’s no secret that every financial decision has its risks as well as rewards. This means you need to know what those risks are right from the start.

With this knowledge, you can anticipate those risks and make a decision on how you want to deal with them. So, I recommend that you review the following risks to make sure you want to assume the responsibility of home ownership.

Risk 1: A decline in value. 

Unfortunately, we saw this risk raise its ugly head in the recent "mortgage meltdown." From 2006-2009, the value of homes declined.

To be honest, this seldom happens on a historical basis (and prices are on the rebound). However, it still tells you there's no absolute guarantee that home values will appreciate.

If that makes you a little nervous, consider this fact: Over the long-term, home prices do tend to appreciate. Also, home ownership is a heckuva lot less risky than the stock market!

Risk 2: Maintenance expenses. 

It takes money to maintain a home - roofing, heating, cooling, siding, paint, etc. This fact means that you must have the money to pay for routine maintenance costs as well as the inevitable big-ticket items (water heaters, furnaces, etc.) that come with long-term home ownership.

Risk 3: Loss of other investment opportunities.  

In the short-term, alternative investments (stocks, bonds, etc.) may give you a greater return in less time if their value rises faster than that of the homes in your neighborhood.

In such an event, you might do better as a renter or investor. However, keep in mind that, as I stated above, this is a short-term strategy.

Risk 4: Lack of flexibility. 

A home purchase ties you down to a specific neighborhood and city. Now, this is a benefit to many home buyers because it allows them to settle down in a community. But, if you're a person who prefers the freedom to “roam," then home ownership may not be a good choice for you.

Here’s what I mean: home ownership doesn't make it easy for you to take a new job elsewhere or move on to a different location. Plus, if you have to put the home on the market in a hurry due to a divorce, job loss, etc., then you can take a heavy financial hit.

Risk 5: Fewer financial options. 

If you have a large mortgage payment, it can make it hard to invest money elsewhere (savings, investments, vacations, etc.).

Okay, I hope this list of the rewards and risks of home ownership has helped you reach an objective decision on home buying. If you'd like further help in analyzing how these factors apply to your specific situation, contact me sclark@deebrealestate.com or 402.305.4335.

Make a Down Payment on a New Home as BIG as Possible!

It’s a fact – a new home down payment affects nearly everything you can think of financially in the buying process – loan program options, interest rate, closing cost amounts, etc.

Here’s the fundamental equation on this subject:

The higher the down payment = more options for you!

Why is this rule true? For the simple reason, that mortgage lenders don’t like risk. Their business is making money by lending money. So, when you make a larger down payment, they say, “Wow, I like this deal because there’s less risk!”

The benefits don’t stop there, either. If you’ve got enough cash for a large down payment, the lender also says, “Hey, I’m willing to give this person more choices because he or she looks like a great bet!” A “smorgasbord” of options opens up to you - conventional fixed rate loans, adjustable rate mortgages, VA, FHA, graduated payment mortgages, etc.

And if you really want loan officers to fall in love with you, not only offer them a large down payment, but combine it with a good-to-excellent credit score. Believe me, you’ll have their undivided attention!

What Are Acceptable Sources for Down Payment Monies?

Generally, lenders want to see adequate funds available for a period of at least sixty (60) days in your account. The usual methods of proof of these funds are either a Verification of Deposit form or two months' worth of your most recent bank account statements.

So, if you're an individual who keeps money "under the bed" or somewhere in your home, it won’t do you any good. That money has to be deposited in an account (bank or investment) for at least two months (preferably longer).

In the real estate/loan world, this is called "seasoning." And the reason behind it is this: First, by having money in an account, it demonstrates to the lender that you have the ability and discipline to save money and, therefore, are a good risk from his or her point of view.

Second, it also demonstrates that the money is likely yours and not a personal loan from a family member or a friend.

Finally, and most importantly, it shows you have enough money on hand for a down payment.

In general, here are acceptable sources for a down payment:

• Checking account
• Savings account
• 401k account
• IRA account (have to meet specific guidelines)
• Money market account
• Stocks
• Bonds
• Mutual funds
• Certificates of deposit and other liquid assets.
• Sale of an asset, etc.
  

To be blunt about it, the safest method to accumulate cash for a down payment is to simply save the money! This action teaches you financial discipline which is good for all aspects of your life, and it means you don't have to “steal’ money from other assets to pay the down payment.

As you can see, there are many different methods of obtaining down payment money, and I’d love to discuss the possibilities with you. Contact me at sclark@deebrealestate.com or 402.305.4335.