4Q2019 | ALL AGES
The American Dream: Buying a House
Ah, the American Dream: You work hard, get a good job, think about starting a family, buy a house and then begin to accumulate wealth in your home to pass on to your children in the hopes that they will be better off than you.
That’s the American Dream, right?
Generations ago, buying a house was part of the American Dream, but so was working for the same company for 40 years and retiring with a pension. Many Americans today switch jobs every four to five years, fund their own retirement through their company’s 401(k) plan and may or may not buy a house. So is homeownership still part of the American Dream?
There is no right or wrong answer. If you can afford a house in your area, plan to stay awhile and have one or two solid incomes, then yes, it can be part of your American Dream. Given the recent rise in real estate prices, it’s not a decision that should be taken lightly. Buying a home is probably the biggest financial decision of your life, so consider both the financial and emotional aspects of it.
Here’s a checklist to help you decide if you should buy a house:
1. Do you plan to stay in the area for at least five years?
You hear it all the time when it comes to real estate: location, location, location. Do you like the area where you plan to buy? Are the mortgage payments within your budget? Does the area have good schools, low crime and easy access to freeways? Do you plan to stay there for at least five years, so you can have sufficient time to build equity in the home and make capital improvements to increase the selling price?
2. Do you have enough cash for a down payment?
It depends on the type of loan a potential buyer is trying to qualify for, but traditionally lenders will require a 20% down payment for a mortgage. Therefore, on a $150,000 home, you’ll need to put $30,000 down. Sometimes, however, you can qualify for a government program that only requires 3% or 5% down. Keep in mind, though, that the lower the down payment, the higher the monthly mortgage payment. Also with less than 20% down, you’ll have to pay private mortgage insurance.
3. Can you qualify for a mortgage?
In addition to your down payment, lenders often look at your debt-to-income ratio, which is how your mortgage payments and other debts stack up against your income. Conventional lenders often use the rule of thumb that your payments (mortgages, taxes, insurance) shouldn’t exceed 28% of your pretax income, and all other combined debts shouldn’t exceed 36% of your monthly pretax income.
4. Have you considered other costs related to owning a home?
In addition to your mortgage payment, taxes and insurance, there are other costs to consider. If you live in a subdivision or private community, you may have to pay homeowner’s association (HOA) dues and higher utility bills. Also, homeowners should have a rainy day fund for unexpected repairs – like a leaky roof, busted furnace or air conditioner that no longer works. Rainy day funds differ for every home owner, but a good rule of thumb is to have 3 to 6 months of living expenses in a savings account for when the unforeseen happens.
5. Is homeownership a good investment?
Although real estate prices fluctuate much like the stock market, homeownership can be an effective way to build wealth over the long-term. When you buy a home with a fixed-rate mortgage, you will have the same monthly payment for specified time frame (i.e. 30 years), whereas renters will have to endure annual increases. The biggest generator of wealth is paying off the mortgage, which can help you accumulate hundreds of thousands of dollars in equity, should you hold on to your home for the duration of the mortgage. Combined with other savings, this can help you retire with a comfortable nest egg.
Whatever your decision, be sure to do your research, speak to real estate agents, lenders and other experts, and—most of all—only buy a property that you can truly afford. Don’t over extend yourself. Then, perhaps, buying a home will be part of your American Dream.
For more information, please contact your QPA Financial Advisor.
Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a Registered Investment Adviser. PCIA: 6201 College Blvd., 7th Floor, Overland Park, KS 66211. PCIA doing business as Qualified Plan Advisors (“QPA”).
This commentary is provided for information purposes only and does not pertain to any security product or service and is not an offer or solicitation of an offer to buy or sell any product or service.