Is buying a home a good investment? You’ve probably heard from the media, parents, older relatives, and, of course, real estate professionals that buying a home is a great investment that always helps to secure your future.
You’re told buying a home is a good investment that will appreciate over time, and that it will help your retirement by eliminating a house payment when you’re older and have a paid off mortgage. Alternatively, you can make money selling the house when you become too old to live alone or just need to downsize to a smaller house or a condo.
On the surface, buying a home looks like a good investment; it only makes sense compared to renting because when you rent, you get no real return on your money other than a place to live for another month.
Is Buying a Home a Good Investment? You be the Judge
When you invest in a house, you expect that investment to go up in value over time. Generally, that’s what happens, but that isn’t always the case. A decade ago, the largest housing bust in American history occurred. It destroyed home values and ruined that investment for a lot of people. We found out that home investments don’t always go up in value as has been said over the years.
Fortunately, this is a very rare phenomenon. The housing market is back into full swing in most areas.
The Numbers on Buying a Home
Start with a few basic assumptions. Assume you intend to invest in a $200,000 home at 3.5% on a 30-year loan. Also assume that you spend $100 a month on maintenance, $100 a month on property taxes and $40 a month on homeowner’s insurance. These are very generous estimates, as the actual costs can vary widely depending on the age of the house and property tax rates where you live.
You’ll pay back the $200,000 purchase price over the 30 years of house payments, plus $123,312 in interest on your home investment. Also, during that 30 years you will have spent $36,000 on maintenance ($100×360 months), $36,000 ($100×360 months) on property taxes, assuming they never went up during that time, and $14,400 on insurance. Overall, during that three decades, you will have spent $409,712 on your housing investment.
Was This Home Investment Worth It?
In order to find out whether your investment in a home is worth it, you must discover how much that home is worth after 30 years of appreciation in value. In this example, assume that over that time, your investment appreciated at 3% per year.
Using the Real Estate Equity Growth Calculator, you find that if your property appreciates at that 3% rate for 30 years, your home will be worth $491,368. What this means is if your home is worth $491,368 and you spent a total of $409,712 on the house, mortgage interest, maintenance, and property taxes, you made a total of $81,656 over 30 years.
Is Buying a Home a Good Long-Term Investment?
In most cases you can end up with a house that’s worth more than you spent over the years; however, all that depends on your interest rate, how much you spent maintaining the house, property taxes, and insurance.
Predicting for sure how well investing in a home will work out for you is difficult. This is because you can’t totally predict how much property taxes or homeowner’s insurance will fluctuate, or just how much maintenance that house may need over the years. But when you consider buying a house, you should always at least make some preliminary calculations.
The Bottom Line
Of course, once you decide to buy, you should be smart and rational about where you buy, how much the utilities cost, and things like whether the place needs a new roof. Maintain your house and invest in it over the years, understanding that it may be part of your secure retirement.
Golden State Mortgage Can Help
At Golden State Mortgage, we are a California based mortgage company, and specialize in FHA home loans for first time home buyers. FHA loans are a great option for first time home buyers and if this is your first home purchase then a California FHA home loans are probably your best option due to the low down payment and easier credit standards. Your down payment can be as low as 3.5% of the purchase price, and closing costs and fees can be covered by the seller. Call Golden State Mortgage today at 1-888-502-2136 or fill out the quick contact form to speak with a California FHA loan consultant and get a free good faith estimate.