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 http://movemetomontana.com
For more on mortgage rates, check here http://www.mortgagenewsdaily.com/reports/newsletter
First Time Homebuyers – 2020 is YOUR year to purchase your HOME!
Let’s just say that the stars are aligning for first time homebuyers. Market forces are good as we are entering a more balanced market that we have not seen in years. In addition, there is an abundance of programs to help the first time homebuyer get into that first home in 2020.
Let me explain why:
Low Downpayment Programs
There are VERY generous programs out there to help with qualifying the first time homebuyer for a purchase with a low downpayment.
- FHA loan program: A loan insured by the Federal Housing Administration. Good for those with low credit scores and little money saved for a down payment. https://www.hud.gov/buying/loans
- USDA loan program: A loan program 100 percent guaranteed by the U.S. Department of Agriculture for lower-income borrowers in eligible rural areas. https://www.rd.usda.gov/programs-services/single-family-housing-guaranteed-loan-program
- VA loan program: A loan backed by the U.S. Department of Veteran Affairs that allows no down payment for military personnel, veterans and their families. https://benefits.va.gov/homeloans/
- Good Neighbor Next Door buyer aid program: A HUD program that provides housing aid for law enforcement officers, firefighters, emergency medical technicians and teachers. https://www.hud.gov/program_offices/housing/sfh/reo/goodn/particip
- Fannie Mae or Freddie Mac loan program: Conventional loans backed by Fannie Mae or Freddie Mac require 3 percent down. Good for those with strong credit.
- HomePath ReadyBuyer Program: A program that provides 3 percent in closing cost assistance to first-time buyers. Must complete an educational course and buy a foreclosed Fannie Mae property.
- Energy-efficient mortgage program: Backed by FHA or VA loan programs and allows borrowers to combine the cost of energy-efficient upgrades onto a primary loan upfront.
- FHA Section 203(k) loan program: Borrow the funds needed to pay for home improvement projects and roll the costs into one FHA loan with your primary mortgage.
Downpayment Assistance Programs
On top of the low downpayment programs, there are actually programs that will grant the first time homebuyer part of the downpayment!
- Montana Neighborhood Lift – Down payment assistance up to $12,500 for service members. https://www.montanalift.org/
- Montana Board of Housing deferred or Bond Advantage Program can provide up to $10,000 https://housing.mt.gov/Homeownership/Lenders/Down-Payment-Assistance
- HRDC Road to Home offers up to $30,000 . https://thehrdc.org/how-we-help/housing/down-payment-assistance/
- Dream Makers Grants for Veterans – Offers up to $5000 . https://www.penfed.org/learn/mortgage-programs-for-veterans
- There are also local and state programs that can help get you into a new home!
Other Positive Factors for First Time Homebuyers
- Prices in the SW Montana area are leveling off and slowing their rate of increase. See my blogs for up to date information on real estate trends! http://movemetomontana.com/montana-blog-real-estate-trends
- Inventory is good and days it takes to sell a home has risen. We are approaching a balanced market where everything is not weighted towards the seller.
- Mortgage rates themselves are quite reasonable and are actually down from a year ago.
Free Seminar for First Time Homebuyers
This is a lot of information to digest. To help, a mortgage broker, Kari Francisco (NMLS #1123666) from First Security Bank and I will be presenting a Seminar with just about everything you need to know to purchase your home in 2020. The seminar will take place on February 8 from 10 am – 12 Noon at the Windermere office in Downtown Bozeman – 135 East Main street. PLEASE RSVP to liz@windermere .com or on my contact form at http://movemetomontana.com/as space is limited.
Pictured home is in Belgrade – check it out on this link. https://www.windermere.com/listing/MT/Belgrade/1308-Fozzie-Lane-C-58714/100542204