Should You Be Timing the Market
No one wants to purchase a home only to see its value decline. But should you wait to buy a home until prices bottom out? A quick web search will yield a number of articles and opinions for and against timing the real estate market, but beware of those in favor of market timing who also want to sell you a how-to book or system. The longer you own your home, the better chance you have of building wealth and protecting yourself from the markets ups and downs.
Home ownership builds equity:
Some people just don’t have the discipline to set aside money each month to save and invest. In this case, a home is more than a shelter; it acts as a sort of an automatic savings account. You can build your savings in two ways:
First, each month a portion of your payment goes toward the principal to build equity in your home. In the early years of the mortgage, most of your payment goes toward interest. Over time, however, that turns around and your equity growth begins to accelerate.
Second, U.S. home prices have always appreciated over the long term. Average appreciation on a home is, approximatley 5% annually, according to the National Association of Home Builders. Over time, history has shown that owning a home is a solid financial investment despite periodic market downturns.
Long term, owning usually beats renting:
In recent years, the cost of buying a home Has gone up and down, while the cost of renting continually increases in the last 5 years. But it’s never a good idea to base long-term investment decisions on short-term conditions. If you decide to rent instead of purchasing a home, you may be in a bad idea considering how rentals are shooting up.
When you buy a home with a fixed-rate mortgage, you can lock in a predictable monthly payment for 15 or 30 years. That means the largest part of your housing costs, principal and interest, are fixed. For some people, that stability, along with the sense of community that comes from being a homeowner, is enough to tip the scales towards ownership.
If the monthly cost of buying vs. renting is comparable, you may consider some related factors to help you decide. When you rent, your landlord receives any appreciation and tax breaks associated with owning the property. If you plan on any significant remodeling, buying may be also preferable to renting.
Uncle Sam wants you…to be a homeowner!
Wouldn’t it be great if the government kicks in some money to help make home ownership more affordable? Because of deductions on mortgage interest and property taxes, the practical effect is that the government is subsidizing your home purchase. In fact, home ownership provides two of the best ways to reduce your tax bill.
Mortgage interest you pay can be deducted from your gross income to reduce your taxable income. Property taxes may also be deducted from your gross income, lowering your overall annual tax obligation.
Speaking of tax smarts, be sure to also consult your advisor about tax breaks that may be available on the proceeds from selling your current home, and on any “points” paid when taking out a mortgage loan.
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