We’ve always been told that buying a house is a good investment. Well, that is true, but that is not the whole picture. This is just our way of justifying the fact that we are borrowing money to pay for the house.
A home loan is always advertised as a good debt because it allows you to increase your assets. In fact, an article from About.com places it as the definition of a good debt. A home purchase usually appreciates in value so the mortgage loan used to pay for it can be considered as an investment.
While home buying through a home loan is the common practice, it does not always mean that it is the best way to acquire a property. This is especially true when your finances are not ready for a mortgage payment plan.
It is true that buying your own home will increase your personal net worth. But that depends on how you will buy it. If you will buy it through a home loan, that house is not yet yours. The bank or mortgage lender owns it. As you pay off the home loan in installment, that is the only way that you start to build up the equity of your home. Even if the title is under your name, you only own as much as the amount that you paid for the house. In the beginning, if you paid 20% of the selling price as the down payment, it indicates that you only own 20% of your home. If you paid less on your down payment, then you own even less.
Signs that a house is not a good investment
There are certain signs that will tell you if buying a house is even less of an investment that it should. According to an article published by FoxBusiness.com, there is never really the right season to buy a home. It will depend primarily on your own financial situation. But if you have to pinpoint a season, the article mentioned that spring and fall are the best times for home buyers. This is the time when the home inventory increases and that means more options for you.
It may be true that you will be saving more as a homeowner because what you should have been paying on rent will instead be sent towards the equity of your home. But before you make the actual purchase on the house, take note of these signs that indicate your home buying plans will not be a good investment.
When it is worth less than what it is selling for
Some homebuyers purchase a home at a price that is just right for the value of the property. But in the midst of it, the housing market crashed and you are now paying a lot more than it is actually worth. That just made your home a bad investment. Even if you try to sell it off, it will not be enough to pay for your overall investment that includes the down payment, home loan, interest, closing costs and other expenses like the insurance, appraisal and professional inspections. When this happens and you are in the verge of giving up your home and selling it, hold on to it first. You might lose a lot more if you proceed to sell off the property.
When the mortgage rate is higher than the usual
Buying a house when the mortgage rates are high is a bad idea. This is especially true when you are getting a fixed price mortgage. That means the interest in your home will not go down in case the mortgage index rate does. This is why it is important for you to buy your home at the right time. The high interest rate can be caused by the housing market or it can be caused by your own bad credit score. A low credit score will deem you to be un-creditworthy and that will force the lender to protect their interest by raising your interest rate.
When you do not have enough cash for the 20% down payment
Another factor that will make buying a house less of a good investment is when you do not have enough down payment to meet the required 20%. When you pay less on your down payment, it means you still have to pay for a PMI (private mortgage insurance) to compensate for that deficit. That is another cost that you have to pay on top of your mortgage. If you can wait to save up for this down payment, then you should decide not to buy a house yet so you can save money and own more on the equity of your home from the beginning.
When a housing market crash looms ahead
The last sign that indicates your home will not be a good investment is when the market is gearing up for a housing crash. Although it is tough to really predict this, if the experts are saying that the value of homes will decline in certain months, then hold your purchase for now. In most cases, buying a home during the housing market crash is a better idea because home values will be at an all-time low. You can get a really good deal when you wait for this to happen.
How to turn your home into a money-making machine
Of course, there are ways of buying a house to be a really good investment and that is to turn it into a rental. This is really how you can make it into a cash cow so it can earn you some money.
An article published on USNews.com, said that the days of flipping real estate is over. This is when you buy a property, fix it up a bit to increase its value and sell it for profit. Now, earning from real estate means buying a house and having it rented. This can provide a steady income that is oftentimes a great option for retirement investing.
But here’s the thing, how can you invest in a rental real estate property if you still do not have a home of your own?
Well here’s one option: ask a mortgage lender how much you are qualified to borrow based on your credit standing and your income. You can do this by getting a pre-approved mortgage. It will tell you the amount that you are qualified to borrow.
Once you have the amount, look for a property that will allow you to convert it into two units. One part of the house will be where you and your family will reside, and the other will be a unit that you can rent out. For instance, you can look for a home with a spacious basement or a garage that you can convert into a studio unit or a small one bedroom apartment. Make sure that the zoning laws in the community will allow this too.
If you can be approved for a $500,000 mortgage, you may want to use this wisely. Do not spend it on a home that only you can live on. Make sure it will also help you pay for the mortgage through the additional rental income that it will give you. With the average mortgage payment of $800 to $1,000 a month, renting out a portion of your house may be enough to cover and even give you some extra income.
That is how you make sure that buying a house is a good investment.