By Ali Sahabi of Optimum Group, LLC
President, Building Industry Association (BIA) Baldy View Chapter
The summer home-shopping season is in full swing and that is why we choose the entire month of June to celebrate the benefits of homeownership. Today home shoppers enjoy the widest range of homes to consider – from “fixer-uppers” to state-of-the-art new homes in new home communities. So, if you will be looking at this summer to be the one to attain your American Dream of homeownership, or if you’re still in the “window-shopping” phase, here are some points to consider about eventually making what will be for most Americans the biggest and best investment of their lifetime.
Low Interest Rates - One of the boons to homebuyers is that interest rates have remained historically low over the past few years. According to the popular personal finance website Bankrate.com, mortgage rates decreased the week of June 5, with the benchmark 30-year Fixed-Rate Mortgage (FRM) falling to 4.09 percent and the 15-year FMR falling to 3.31 percent. 30-year Jumbo Mortgage rates (for loans above $650,000) and 5/1 Adjustable Rate Mortgages (ARMs) also dipped. To give you some perspective, in January of 2014, the firm reported the 30-year FRM hovering at about 4.69 percent and two decades ago FRMs were averaging about 9.5 percent with ARMs averaging about 7.6 percent.
Flexibility in Down Payments - Today there are options for purchasing your home without a 20 percent downpayment. For example, the Federal Housing Administration (FHA) offers loans to first-time homebuyers with considerably lower down payments although these loans require mortgage insurance. To find out more about what is available from the FHA, visit their www.FHA.gov website. Keep in mind that today, new home community builders often arrange favorable financing for their customers or offer financial incentives.
Tax Benefits for Homeowners Only - Before shopping for a home, check with your tax preparer to find out all of the tax advantages of homeownership. Tax incentives are also designed to make owning a home more affordable and the National Association of Home Builders (NAHB) reports that homeowners save nearly $100 billion annually on mortgage interest and property deductions alone. In most instances, all of the interest and property taxes you pay can be fully deducted from your gross income to reduce your taxable income. These deductions can result in thousands of dollars of tax savings, especially in the early years of the mortgage when interest makes up the bulk of the payment.
The Advantages of Leveraging - A buyer can purchase a home and receive the full benefit of homeownership with a cash downpayment that is only a fraction of the total purchase price. This is called leveraging, and it makes the rate of return on a home purchase greater than on other purchases with the same value such as stocks where the buyer must put up the entire price. NAHB illustrated how homeownership serves as an excellent investment opportunity: on a national level and over the long run “home appreciation has historically increased five to six percent annually. So, if a homebuyer puts ten percent down on a $200,000 house for an investment of $20,000 at a five percent annual appreciation rate; that $200,000 home would increase in value $10,000 during the first year. Earning $10,000 on an investment of $20,000 is a 50 percent annual return. By contrast, putting that $20,000 down payment into the stock market and getting a five percent gain would yield a $1,000 profit.
Looking at it another way, “over a longer period of time, if someone put $10,000 into the stock market in 1996, the average annual S&P return would make that investment worth $21,500 today - an increase of $11,500. The median home price in 1996 was $140,000. Today, that same home would have gained nearly $100,000 in value”.
Homeownership is also a more stable investment. Home values tend to increase at a steady pace while alternatives can be extremely volatile. For example, during the stock market decline of 2001-2002, households lost more than $1 trillion in stock value, while their housing equity continued to climb.
For most Americans, homeownership is a primary source of net worth and an important step in accumulating personal financial assets over the long term. For most families, home equity represents the largest share of net worth.
The BIA Baldy View Chapter seeks to advance the opportunity to attain the American Dream of home ownership. For additional information on homebuying, home improvements or the benefits of homeownership, go to www.biabuild.com or www.nahb.com/forconsumers on the web.
And have a great National Homeownership Month.