Financial Hacks for Millennials: Home Ownership by the Numbers
Even having lived through the housing crisis and great recession, millennials are bullish on home ownership. According to a 2018 survey, 85 percent said they expect to own a home someday.1 The big question: When is the right time financially to make that move?
Really, there’s no right answer. But there are lots of variables to consider: your career goals, family situation, income, for starters. These critical numbers can help you make informed decisions.
Home ownership can help jump-start wealth accumulation. The net worth of home-owners is 44 times greater than that of renters.2 That’s because every mortgage payment is a form of “forced savings” that helps you build net worth by increasing the equity in your home.
On the other hand, the flexibility of renting may have greater appeal to you right now because it frees up your cash for other uses such as investments or whole life insurance. Becoming a world-class saver 3 and investing in a well-diversified portfolio can also help grow your wealth while you accumulate the funds for a down payment. “The key is maintaining liquidity and not tying up too much of your net worth in illiquid purchases,” says James Matthews, Financial Advisor with Consolidated Planning, a financial services firm in Charlotte, North Carolina.
Fantasizing about your ideal home is great, but how much house can you really afford? For financial balance, your mortgage payment shouldn’t exceed 15 percent of your monthly gross income. (If you’re making $6000 a month, that’s $900.) “Keeping your payment in the 15 percent range can allow you to put other dollars to better use – such as protection or savings,” James explains.
15 OR 30
Fixed-rate mortgages offer great protection. As for length, you can build equity quickly with a 15-year plan, but the low payments of a 30-year contract can give you financial flexibility. “Having a 30-year can provide lower payment for a longer time, giving you access to more of your cash flow to put towards other goals,” James says.
1000 SQ. FT.
Think small for your first home. Even tiny. Your mortgage, utilities, maintenance and repairs will be lower — allowing you to stretch your budget and save for other goals as your income begins to climb. Cutting expenses in other areas is a good idea too. James also advises picking a home where you can live comfortably for at least five to seven years, a time frame that can allow you to recoup the upfront costs in home-buying.
81% of the most financially confident Americans own whole life insurance.A key reason is the flexibility provided by the policy’s guaranteed cash value, which can be applied to a down payment on a home once enough cash value is accumulated.4
Until recently, interest on home equity loans was tax-deductible for a range of expenses. But starting in 2018, interest is deductible only if you use the home equity loan to buy, build or substantially improve a home.5
Drive a hard bargain when house hunting, especially on fees and commissions. Millennials are significantly more likely (73 percent) to negotiate with real estate brokers than Boomers (24 percent).6 And nearly two-thirds report success!
No matter where you stand on home ownership now, educate yourself. There are hundreds of good online resources on all aspects of buying a home, from establishing good credit and determining an affordable mortgage payment. The more you know, the more confident you’ll be in your decision.
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