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First Time Home Buyer
How to build wealth with real estate
Are you ready to buy a home?



Real Estate is still the best investment for the average Joe and Jane who want to plan for the future. Owning real estate is the first step to building wealth. And the best way to start building wealth with real estate is to buy a home for yourself.

Although buying your first home is a logical first step to building wealth, it is probably the largest financial commitment in your life. Some people are not ready to be homeowners. Is home ownership the right goal for you? You should weigh the benefits and drawbacks of home ownership and make the best decision for you and your loved ones. Letís lay out all the factors, the pros and cons that come into play in making this decision.

Are You Ready to Buy a Home?

To become a homeowner, you should already have stability in your life. You should be able to count on a long-term, dependable job. Is your relationship with your partner a lasting one? If your relationship falls apart, you could be forced to sell your home quickly, no matter what the market.

Do you manage money well? And do you have a good credit record? As a homeowner you must be willing to budget a significant portion of your take-home pay for the costs of maintaining the house. Can you live within your means and avoid credit card debt? Can you save enough money for your down payment and closing costs?

Will you be happy giving up some freedom? When necessary, you must be willing to forego impulsive shopping and travel, and work toward your long-term financial goals. Are you ready to put down roots?

Do you plan on remaining in the same area for a few years? The longer you own a property, the better your chances of seeing its value appreciate. As a homeowner, you are committed to life in your community. Renting gives you the freedom to move around without having to wait for a house to sell. For a homeowner, moving out of town on the spur of the moment is not possible.

Do you know the area well enough? If you have relocated to a new town you hardly know, spend a year in a rental unit until you're certain where and how you want to live.

As you can see, renting for a while is the better option for you if your job outlook is uncertain, if your relationship with your partner is uncertain, if you donít manage money carefully, if you donít plan on staying in the area or you donít know the area well, or if you donít want to be tied down with responsibilities. While you are renting, use the next few months to get these areas your life on track. When you have a solid personal and financial footing, you can launch your plans for home ownership.

The Costs of Buying a Home

Along with owning a home come new expenses and the need to budget for them. As a homeowner you will be responsible for monthly payments on the mortgage loan. Part of your payment the bank earns as interest, but a portion of the monthly payment reduces the amount you owe on the loan. Every six months you will also pay property tax, which is computed as a small percentage of the value of your house. You will pay for gas and electric service, water and sewer usage, garbage pickup and property insurance. You can expect to pay for house repairs as they are needed. You will cut the grass every week, paint the exterior every five years, clean gutters every fall and seal the asphalt driveway every other year. No more can you rely on a landlord to repair dripping faucets and dishwashers. You must take over as your own landlord.

There are other costs to take into consideration. When you borrow money to purchase your house, you will pay to the bank ďpointsĒ and closing fees, which may be about 2%-3% of the purchase price of the house. If you decide to sell your house, and use a real estate salesperson, as most people do, you will be charged a sales commission of 5% to 7% of the selling price. Because of these costs, you should plan on living in the house at least three years. If you sell your house during the first three years, it is likely that the cost of the loan points plus the cost of the sales commission will exceed the gain in value of the property, and you will lose money on the investment. If you are under urgent pressure to sell your house, you might have to accept an offer that is less than what you paid for it, and thus lose additional money.

The Financial Rewards of Buying a Home

The major financial benefit of home ownership occurs over time. Year by year, inflation increases the cost of everything, including housing. Gradually, your house will become more valuable. By making monthly mortgage payments, you are paying back the mortgage loan. Your equity in the house, which is the current value of the house minus the balance owned on the loan, grows month by month. If you sell the house, your equity becomes cash in your pocket. If you keep the house, you can convert your equity to cash by increasing the amount of your mortgage.

If you continue to pay off the mortgage as many people do, there will come a time down the road when you own, free and clear, a house worth substantially more than you paid for it. And all the while you have had the use of that house for yourself and your family, you have the privacy of your own home, you have had pride of ownership, and you have built roots in your community.

The past few years have been a powerful sellers market. Historically, home values usually rise, but there will be slow periods in the real estate market when your neighbors will take less for their houses. Values of homes fall slightly when interest rates are rising and buyers are scarce. The housing market does not collapse the way the stock market is known to do, because during hard times people still need some place to live. In fact, over the long term, the value of a home tends to rise by about 3% a year. As long as you are not compelled to sell your home in a slow market, you will benefit from rising real estate values.

There are non-financial benefits of home ownership, too. Your home is likely to be larger than your apartment, with space for all your stuff. You can personalize your rooms to suit yourself. There wonít be noisy parties going on upstairs after hours, and there wonít be complaints about the volume of your music. You will have more privacy. As a stakeholder, you may decide to become more involved in the community.

Tax Benefits for Homeowners

Homeowners receive two tax benefits on their yearly Federal Income Tax Return. The first benefit is that the interest you pay on your mortgage is tax deductible every year (for mortgages less than a million dollars). The second benefit is that the amount you pay for property taxes is deductible every year. As a homeowner, you will save money on your federal income taxes every year. If you fall into the 28% tax bracket, each year you could save up to 28% of the amount of your home interest and property tax expense.

The Wrap-Up

If you continue to rent, you will have a handful of rent receipts to show for the lost time, while your landlord gets the benefits of owning his building. You will be no better off than when you started. But if, on the other hand, you own your own home, you create financial wealth for yourself and a share in the American dream.

By now you have weighted the costs and benefits. I hope you decided that home ownership is the best decision for you. That decision is a major milestone in your wealth building agenda. You are focused and determined. You are committed to a strategy of financial success.

I hope life brings you much success. I wish you a very happy day.
-----     Surfer Sam  

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