Over the weekend, I taught a first time home buyer seminar. I love helping first time homebuyers get into their first home because it means so much not only emotionally but also financially. It is the start of a secure financial future that can help you all the way through your retirement. Now is a particularly good time to purchase a home as interest rates are at multi year lows, inventory is better than it has been in a while, prices are still increasing but at a less rapid rate and there are plenty of low downpayment programs and down payment assistance options.
I want to focus today’s blog though on exactly how and why you are creating wealth as a first time home buyer and is an important building block of your portfolio and financial future.
The example that I used in the seminar is pictured on this white board photo and I will bullet point it out so it makes sense.
Case #1 – Rent
First assumption is that a person rents an apartment for $1000 a month.
The $1000 goes to the landlord.
The benefit received by the renter is a place to live. The renter is not paying off a larger debt to eventually own the home outright. ( Unless this a very rare lease to own situation)
There are no tax benefits associated with paying rent.
Case #2 – Purchase home with financing , usually from a financial institution.
This person has purchased a home with lender financing and pays $1000 a month to the lender.
What happens to that money is the interesting part
Part of it (I am using $500 a month in my example below) goes to the bank as interest to pay the bank for using their money. But the other part of the $1000 payment goes to pay principal on your loan. Principal is the part of the purchase price that you borrowed to purchase that house. Every principal payment increases your ownership in the house as you owe the bank less with each payment you make.
In my example, $500 a month goes to principal which turns into $6000 a year. In the space of one year, you have will have reduced your debt by $6000 and that continues for as long as you have that loan.
So that’s a bit of wealth creation right there as you own more and more of a valuable asset. The money that you pay off is considered your equity in your home.
But that’s not all…you will also be able to take advantage of an appreciating real estate market.
I know we all like to complain about rising home prices but did you think that the flip side is that if you actually own a home with the help of a lender, the rising home prices increase the value of your home too! And guess what, the bank doesn’t get any of that, its all yours!
You may not touch that equity and wealth for many years but you may want to consider what it can do for you.
Some examples :
- The equity that you earn simply by paying your mortgage and letting your home appreciate may provide a large down payment for your next home, say if you needed another for a growing family.
- It can help pay for a second home or an investment property
- The equity from the first home may help pay for kids schooling
- It can serve as nice retirement nest egg
To recap the benefits that one gains from paying a mortgage over rent:
- The interest portion of your payment is tax deductible
- The principal portion of your payment pays off debt (good for the credit score), increases your ownership in that house and creates wealth as your equity builds
- The value appreciation which increases your equity in that home belongs only to you, not the bank.
- You have a solid financial wealth tool that can be used later for when you need it.
That first home with very little down can be a springboard to financial security down the road. Purchasing a home is really one of the best leveraged investments you can make. Now is a great time to take advantage of this just because of the all of the positive market conditions and available money at low rates.
Please reach out and let’s talk more about more about creating wealth as a first time home buyer!
Check out my website and blog https://movemetomontana.com
For more on mortgage rates, check here http://www.mortgagenewsdaily.com/reports/newsletter