Millennial's Ask About Buying a Home

Real Estate Broker/Owner with Grady David Tipton Brokerage Florida # BK451206

I just graduated! I’m ready to start enjoying my

life…why should I buy a house now?


This is a reasonable question. Buying a home is a large commitment.

It is also one that will be likely to keep you in one place for quite

some time. If you are thinking about a series of job transfers, or

significant changes in your lifestyle over the next few years, you

should think carefully about taking on that large responsibility.

Look at the real cost of owning a home compared to renting a

similar one. To do this, we should start with a few assumptions:


1. You plan to stay put for at least a few years. While selling a

home that no longer meets your needs or life’s situation is not

difficult, it does take some time to accomplish. If your job were

to call for a transfer, you’d be faced with the choice of selling

the home or of keeping it as an investment. Either choice is

possible, but this is a matter worth careful consideration to

before buying.


2. Your income is reasonably secure. If you are at the beginning

of your career, you should feel confident that your job will

continue for the foreseeable future.


3. The real monthly cost of ownership is not a financial burden.

The first consideration in comparing renting and owning is the cash

needed to buy. It is true that there are many loan programs

available requiring a small down payment—3ó% or less—but you will

have to pay additional money for closing costs.  Be aware that you will

likely have to come up with more money than the down payment.

You should have an idea in advance of how much cash you will

need to buy the kind of home you’ll be satisfied with, and where the

money will come from.


Next, be aware of the tax aspects of home ownership. A detailed

explanation of how tax deductions work is beyond the scope of this

book, but you should be mindful of the fact that you may be able to

reduce your income tax liability substantially when you deduct items

such as mortgage interest and property tax. You should consult a tax

professional early in your decision process to get an idea of what

those savings will be.


This is an important thing to know; if your tax consultant tells you that you may save $2,400 a year by deducting mortgage interest and property taxes, a $2,000 total mortgage payment becomes the equivalent of $1,800 because of the tax

savings. Your tax consultant will show you how to increase the

exemptions on your W-4 to increase your take-home pay rather than

having to wait for a tax refund at the end of the year.


Next, determine how much of your monthly mortgage payment

goes to reducing your principal balance. If you have a $200,000 loan

at 4.5%, for example, your monthly payment will be $1,013. In your

first year, you will pay down the balance to $196,773, or $3,226. You

should think of this part of your payment as a sort of “forced savings”

account. Although the amount of interest you’ll pay decreases each

year as you pay down the balance, we can use the first-year figure

for our simple comparison.


The monthly mortgage payment (not

including taxes and insurance) is $1,013, but $269 each month goes

to your “forced savings” account. You should consider the remaining

$744—the interest on your mortgage—to be like the “rent” on the

money you borrowed to buy your house.


You will also pay taxes and insurance when you own your home.

Your landlord pays those items, too, but that is part of the rent you

pay. For this example, we’ll assume that your taxes and insurance

amount to $1,400 per month.


You can begin your rent-vs-own comparison by looking at the

difference between the rent you would pay now with the taxadjusted

mortgage payment. We’ll assume that you can rent a

house like the one you can buy for $1,200 per month. Although the

expense of owning initially seems to be $200 higher each month,

that difference may disappear when we account for the taxadvantages.

The real cost of owning a home decreases, even more,when we consider the part of each paymenthat reduces the principal balance.


This comparison may seem overly simplistic, and in one sense, it is.

We have not considered the cash needed to buy the home. Getting

together a 20% down payment plus a few thousands more for a

down payment is not a trivial undertaking—and it is a major

challenge for a great many people. For more info.


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Comments (2)

Golden1 Agents
San Mateo, CA

Thank you for sharing your thoughts. 

May 06, 2018 02:08 AM
Kristin Johnston - REALTOR®
RE/MAX Realty Center - Waukesha, WI
Giving Back With Each Home Sold!

Great information.  Thanks for sharing and have a wonderful day!

Sep 13, 2020 06:58 AM