Buy a Home?
The heading is phrased as a question rather than an advice statement, because there is a debate about whether this is really a good idea. It is pretty much agreed that owning a home is a good thing, but the question is, at what point is it best to do this. David Bach in his bestselling book, The Automatic Millionaire, highly recommends buying a home as early as possible. His perspective is that this is one of the best investments you can make. On the other hand Robert Kyosaki, in his Rich Dad book series, portrays a home as a liability rather than an asset. Mind you, Kyosaki is not saying that one should not bother with a home. He simply believes that one probably would be better off using the money to purchase a home, to put in “investments” that actually provide a cash flow, or contribute to lowering expenses.
So rather than advising one view over the other, some of the points in favour and against each side will be highlighted, and the reader can then make his own judgment of how best to proceed here.
In favour of purchasing your home are:
1. If you are renting now, then acquiring your home will allow you to have something (ie. the house) at the end of the day to show for your monthly payments. Also, the monthly payments will eventually stop (when you pay off the mortgage), whereas if renting, this expense will always be there.
2. Buying a home allows leveraging power. If you paid $10,000 down payment on your home that costs $50,000 and borrowed the rest, you would be using $40,000 of someone else’s money. That is you put one-fifth the value, which means you have a five to one leverage. Now let us say that the value of the house appreciated to $80,000 in a few years. You could then turn around and sell it, making a theoretical $30,000 profit after paying back the loan. So in effect, you would have been getting $30,000 for your $10,000 investment (actual profit would be smaller as there are various fees and expenses to take into consideration). That is 3 times your investment.
3. Depending on the country you live in, there could be tax breaks for becoming a homeowner.
4. Real Estate tends to appreciate in value.
Arguments for viewing your home as a liability:
1. It is common for people to never really own their home, as people tend to buy a new home every so many years, each time starting over a 30 years loan to pay off the previous one.
2. Although there are tax breaks on mortgage payments, all other expenses involved are from your money that has already been taxed.
3. There are property taxes to pay, which can increase.
4. It is possible for houses to not appreciate.
5. Your money gets tied up in the purchase of the house and the expenses that come with it. This money could instead be used to build an investment portfolio that would increase cash flow. So one effectively loses time for which these investments could have grown, capital which could have been used to compound the investments, and education which comes from the experience of investing.
Now in the event you decide to purchase your home, here is a useful tip for repaying the mortgage.
Negotiate your mortgage payments such that it is accepted twice a month. If you pay twice a month, rather than once, you will end up saving some years of payments. For example, if your monthly payment is $2000, then your strategy should be to pay $1000 every two weeks. The reason that this will save you a substantial amount, is that you in effect cut down earlier on the loan amount that is gathering interest. In reality your loan is gathering interest each day. Paying some of it early lowers the amount that the interest can accumulate by. Check out this calculator Mortgage Calculator Put in some figures, and you’ll see the comparison made between paying once a month, as opposed to twice. The higher your interest rate, the greater the variance in the two approaches.
Here is an example of the details for a 30 year mortgage on $80,000, at 8% per annum. Comparison is made if the payment is done monthly versus biweekly (every two weeks).
Monthly Payment: $ 587.01
Total Int.: $ 131324.2
Avg Int each Month: $ 364.79
Biweekly Payment: $ 293.51
Total Int: $ 93192.54
Avg Int each BiWeekly Period: $ 119.17
Year# Standard Biweekly
1 $ 79331.71 $ 78697.72
2 $ 78607.95 $ 77287.53
3 $ 77824.12 $ 75760.49
4 $ 76975.23 $ 74106.93
5 $ 76055.89 $ 72316.36
6 $ 75060.23 $ 70377.42
7 $ 73981.95 $ 68277.83
8 $ 72814.16 $ 66004.26
9 $ 71549.45 $ 63542.32
10 $ 70179.76 $ 60876.37
11 $ 68696.4 $ 57989.54
12 $ 67089.91 $ 54863.5
13 $ 65350.09 $ 51478.45
14 $ 63465.86 $ 47812.92
15 $ 61425.25 $ 43843.66
16 $ 59215.26 $ 39545.52
17 $ 56821.85 $ 34891.24
18 $ 54229.78 $ 29851.32
19 $ 51422.57 $ 24393.8
20 $ 48382.37 $ 18484.07
21 $ 45089.83 $ 12084.68
22 $ 41524.01 $ 5155.04
23 $ 37662.23 $ 0
24 $ 33479.93 $ 0
25 $ 28950.5 $ 0
26 $ 24045.12 $ 0
27 $ 18732.6 $ 0
28 $ 12979.15 $ 0
29 $ 6748.16 $ 0
30 $ 0 $ 0
Paying biweekly in this case results in 7 years less of mortgage payments!
Note: Ensure that your financial institution is crediting your loan as you make your payments. If they take your money but don’t credit it until the end of the month, then there will be no advantage.
+ Determine whether buying a home is in your best interest at this stage of your life
+ If you decide you want to purchase a home, determine how much you want to pay from your own pocket,
+ Start saving toward this
+ Make it automatic
+ Get a mortgage that allows biweekly payments.
+ If you decide you side with Robert Kyosaki, then maybe you will want to purchase his books Rich Dad Poor Dad and Guide to Investing
- Eliminate Credit Card And Other Bad Debt
- Save And Become A Millionaire
- Pay Yourself First!
- Multiple Income Streams
- The Richest Man in Babylon