The Best Homebuying Strategies for Building Wealth
You don’t want to throw money away on rent anymore, do you? Instead, you can buy your own home and pay yourself instead of a landlord. Every monthly payment you make on your mortgage gives you an increasing share of ownership in your home and a decreasing share of ownership from the bank.
Your home will typically increase in value a long-term average of one to three percent a year, just from inflation. You can also increase your home’s value with routine maintenance and improvements to keep it up-to-date and appealing.
As rents and purchase prices for homes rise, your fixed-rate monthly mortgage payment will remain the same, allowing you to eventually put more cash toward paying off your mortgage sooner.
Home ownership is one of the core means of building wealth, along with savings and investments. To buy wisely and profitably, follow these three strategies: prepare financially now, purchase an affordable home, and live in and maintain your home for a long time.
Save for a down payment. Down-payments under 20% spell risk for lenders. You’ll pay a higher interest rate, and you’ll have to get private mortgage insurance, about 0.5 to 1.0% of your mortgage. That’s about $2000 a year on a $200,000 mortgage, which will add about $167 to your monthly bills.
However, paying PMI allows you to get into a home faster with less money down. You can eliminate the PMI payments or refinance to a different loan once you reach 20% equity.
Meanwhile, establish a firm budget. Limit credit card spending and pay down debts. Don’t increase your spending when you get a raise. Use any extra income to eliminate debt or to put into savings for your down payment.
Choose wisely. Your home should improve your lifestyle, but not cripple you with debt. It should serve your household’s needs for at least five to ten years or longer, so carefully consider the location, price and condition of the home you choose. You should be happy with the neighborhood, commute times, the size of the home – not too big or too small, the number of bedrooms, and any amenities that are important to you.
Buy within your means. Your monthly payment, including mortgage interest and taxes, should be no more than 28-30% of your gross income. Including your monthly debt service to student loans, credit cards and other obligations, your monthly payment should be no more than 40-42% of your gross income. As your income improves, you’ll be able to meet other life goals, such as growing your family, starting a business, or buying more property.
Buy for the long term. The longer you own your home, the more equity you’ll build. Think of equity like savings you’ll get back when you sell or rent the property some day. Staying put will allow you the means to buy more property, perhaps a second home or a vacation home. Your first home can become a rental, generating income for you.
Take care of your property. Keeping your home repaired and updated is the best thing you can do to protect your investment. A home in top condition always sells for more money than homes in less desirable condition.
If you were to remain in your home for the duration of your mortgage, one day you’ll own the home free and clear – a terrific position to be in as you head toward retirement.