By Brian Bloxom, ChFEBCSM
Growing up it seemed like a certainty that one day I would own my own home—yes, with that white picket fence symbolic of financial independence and adulthood.
While owning a home is a fantastic accomplishment for anyone, it’s a commitment, responsibility, and no easy feat—and far from a certainty. In addition to requiring a large investment of money, purchasing a house also involves several smart financial moves and good decision-making to land the right home at the right time. Considering 2021’s booming housing market with record-low inventory, (1) and depending on where you are in your life, it may be better to rent rather than own.
Ask yourself the following questions to determine whether you should pursue homeownership or continue renting.
Are You Settling Down For The Long Term?
Closing costs and real estate commissions usually consume about 7% to 15% of the sale of a home. (2) This is why experts typically advise prospective home buyers to only buy homes if they plan on living in an area for a minimum of 5 years, as it is long enough to break even before selling the home. If you plan to live in your area for less than 5 years, for work or school, it would be better to rent rather than own so you have the flexibility to move at a moment’s notice and not be tied down financially.
What Can You Afford?
Owning a home is not cheap. First, you have to look at how much money you need for a significant down payment, at least 20% if you want to avoid the extra monthly cost of mortgage insurance tacked onto your mortgage bill. Then you need to consider your monthly mortgage payments and utility bills, as well as other expenses such as homeowners association fees, insurance, and home improvements and upgrades. Add up all of these numbers and compare the final price tag to what you currently have in your financial portfolio. If the price is too steep, or you live in an area with high housing costs, then it is best to continue to rent and build up your finances in the meantime.
How Much Do You Have In Savings?
To qualify for a 30-year conventional home loan, you will need to put down at least 3% of the price of the home. But to avoid private mortgage insurance (PMI), you’ll need a minimum of 20%. Mortgage insurance is typically 0.5-1.5% of the loan amount per year. If you receive a loan of $250,000, your monthly PMI will add anywhere from $100-315 a month until you reach 20% of equity. (3)
Let’s say you want to put 20% down and have enough in savings, but purchasing the home would wipe out your savings and leave you without an emergency fund. You might want to hold off on your home purchase until you’ve saved a bit more. Your emergency savings should be your top priority, as you will always need to be prepared for a rainy day whether you own a home or not. The rule of thumb for emergency savings is to have enough money saved up to cover 3 to 6 months’ worth of expenses. If your savings account has more than enough money to cover emergencies and your desired down payment, then go ahead with homeownership. If not, aim for the emergency fund first and then make a plan to save for a down payment.
The Tax Question
Many people are drawn to buying a home so they can receive the tax benefit that goes with it. But remember that in order to receive the deduction, you must itemize your taxes. Depending on the value of your home, the standard deduction might be more than the interest rate deduction. Also, as you pay off your mortgage, the amount you dedicate to interest decreases each year, meaning you will receive a small deduction. And if you have already paid off your home, you can only deduct your property taxes.
How We Can Help
Retirement will be filled with all kinds of decisions regarding how you spend your time, your energy, and your money. Deciding whether to rent or own during this season is one of those personal decisions you must make based on your unique set of circumstances and values. No matter which way you go, this is not something you should rush into without evaluating your finances and your future plans. This is where an objective financial professional can help you review your options from a variety of angles.
We at Sentinel Wealth Partners are here to be that partner on your financial journey. We specialize in providing truly tailored financial advice and offering solutions focused on minimizing taxes and fees. We would love to help you evaluate your situation and make a decision that will benefit you for years to come. Reach out to us today by calling our office at 703-832-0164, sending an email to email@example.com, or using our online calendar.
Brian Bloxom is an Independent Financial Advisor, Chartered Federal Employee Benefits Consultant (ChFEBCSM), and Chartered Retirement Planning Counselor (CRPC) with 25 years of experience in financial advising. He founded Sentinel Wealth Partners to serve retirees, individuals approaching retirement, and individuals managing complex retirement plans such as company plans or federal benefits plans. His expertise and dedication to helping his clients achieve their goals make him a trusted resource that will help you feel confident in your customized retirement plan. Brian’s mission is to be available to his clients—all the time. He’s here to solve your problems, relieve your anxiety, and give you optimism for retirement. Because ultimately, your retirement should be about well-deserved enjoyment, and not about stress or anxiety. When he’s not working, you can find Brian spending time with his wife, Jessica, and their two sons, Spencer and Preston. He enjoys coaching soccer, serving in his community, golfing, and relaxing at his vacation home at Lake Anna, VA. To learn more about Brian, connect with him on LinkedIn.