What first-time homeowners need to know
Homeownership remains a central part of the American dream.
In fact, according to a 2022 survey, when asked to rank the hallmarks of economic prosperity, 74 percent of Americans say they place the highest priority on owning a home.1 But affordability continues to be challenging for many. 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, and income, for starters. These critical numbers can help you make informed decisions.
Home ownership can help jump-start wealth accumulation. The net worth of homeowners is 40 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 S&P 500 investments or whole life insurance. Becoming a world-class saver and investing in a well-diversified portfolio can also help grow your wealth while you accumulate the funds for a down payment. 3
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 $6,000 a month, that’s $900.) By limiting your payment to about 15 percent, you’ll have enough money for other necessities.
15 OR 30
Fixed-rate mortgages offer great protection. As for length, you can build equity quickly with a 15-year mortgage, but the low payments of a 30-year contract can give you financial flexibility because you’ll have access to more of your cash flow.
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. In general, if it’s possible, pick a home where you can live comfortably for at least five years, which is a reasonable time frame to allow you to recoup the upfront costs in home-buying.
79% of the most financially confident Americans own whole life insurance. In addition to providing a death benefit, it also provides flexibility through the policy’s guaranteed cash value, which can be applied to a down payment on a home once enough cash value is accumulated.4, 5
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 to determining an affordable mortgage payment. The more you know, the more confident you’ll be in your decision.
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