Don’t Think of a Home as Your Main Investment
People tend to believe that homes are appreciating assets, but this isn’t always true. Yale economist and Nobel prize winner Robert Shiller debates this topic openly, having crunched the numbers. He says that, overall, the housing market doesn’t have a great long-term return.
While that single real estate asset might help protect you against inflation, a well-balanced stock and bond portfolio seems to be a better investment. But a lot of people’s portfolios are mostly made up of their home value. You wouldn’t put 80 percent of your portfolio in a bond simply to protect against inflation (unless maybe you were nearing retirement) so why would your home make up that same amount? That’s the argument against buying a home as an investment.
Decide How Much You Can Afford
In deciding whether you can afford to buy, you’ll have to figure out how much home you’re planning on buying in the first place.
Take-home pay (after taxes, after tax-deferred retirement contributions)
All of your other debt and monthly payments. He notes that if you have high-interest loans, you should pay them down before looking to buy a home.
Consider your other priorities (children, retirement)
Calculate your down payment amount. It might make more sense to save and wait.
Use a mortgage calculator to see how much you can afford, but add in the estimates for the above costs.
Leave a cushion in your monthly budget between income and total monthly expenses.
Weigh the Opportunity Cost of Renting Vs. Buying
While your home might not be the best investment, in the end, it’s still yours. Even if it barely outpaced inflation, at the end of the day, you own it, and that’s worth something.
You rent, you own nothing—the money is given to someone else. So lots of people argue that you should own a home because one day, you’ll pay that home off and it’ll be yours, rather than continuing to pay rent for the rest of your life.
Sometimes, you can actually earn more money over time by renting and investing than buying. But whether or not this is true depends on a few factors:
Your rent cost: If your rent is cheaper than your mortgage, you may be able to invest the difference and earn a better return, long-term.
Down payment & mortgage interest rate: Same story here. If you invested $50,000 instead of using it for a down payment, and also invested the amount you paid in interest over time, how much more would you have in the long term? In some cases, you’d have more than the value of your home.
Where you live: The housing market depends on many factors and changes, but where you live is a big one. Your rent prices and home prices may be a lot different than the national averages.
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