Starter Home? Financially smart?

Barbara

Tue, Jun 03 2014, 8:55 am

saw50st8 wrote:

Barbara,

The interest you pay on your mortgage is also tax deductible. If rent and mortgage are the same, you come out ahead (usually).

Yes, they're tax deductible, but you're still spending a lot on interest.

I'm not saying buying a starter home is a bad idea. In fact, I don't understand the concept of "must go for biggest and best to begin with." Still, anyone who believes that mortgage payments are "payments to yourself" is fooling herself.

cookiecutter

Tue, Jun 03 2014, 9:53 am

Barbara wrote:

If only there were some process by which on could calculate the relative costs of rent and mortgage, accounting for the change in tax liability!

There are several types of rationales that would justify buying a house.

1. Cost: In the current market, it is often cheaper to buy than to rent. If it costs 2000 a month to rent, and 2200 in monthly payments to buy, and the mortgage will be an average of 65% interest for ten years, and you are in a 25% tax bracket, then your net mortgage debit will actually be 1943 or so a month,which is cheaper than rent.

2. Risk of rising rent: as someone mentioned above, the monthly payment on your own home stays relatively constant while the rent tends to go up. If you are able to hold on to the house when you move to your "dream home" it can still be a relatively safe investment with positive cash flow.

3. Personal financial regulation: If you are someone who finds it hard to save, owning a home can help you by directing your spending toward a single goal, rather than losing track and not knowing where things end up. I.e. if you find it hard to cut out fast food to save, you might find it easier to cut out fast food so that you can afford the house. The money is then "savings" in that it helps build equity rather than waistlines.

gp2.0

Tue, Jun 03 2014, 10:05 am

Absolutely get the starter home if you can afford it. Housing is at the bottom of the curve now and on the way up. Obviously this depends on location. But in 6 years you will probably be able to sell with slight profit or rent it out. If you can, maybe a starter house with a rentable basement so you get income.

The big difference between renting and buying is that renting only gives you a place to live, while buying gives you a long term investment in addition to a roof over your head.

The Happy Wife

Tue, Jun 03 2014, 11:27 am

Barbara wrote:

I agree with your conclusion that a starter home is a good idea.

What I'm not sure is why everyone thinks that mortgage payments "will go to yourself instead of the landlord." They actually go to the bank. If you were to take a $250,000 mortgage today, in 6 years, your balance would still be more than $226,000, and you would have paid something like $86,000 in interest.

What you're really doing is betting that the home value will go up.

I think people are referring to the fact that you get equity as you pay off your mortgage, vs only getting a temporary place to live when you pay a landlord.

Lilibet

Tue, Mar 24 2015, 12:07 pm

Location, location, LOCATION. The starter home ONLY makes sense in a neighborhood where you are reasonably confident (no certainty exists, except for those who own a crystal ball) but you have to be reasonably confident that the neighborhood you live in with maintain its value or increase in value. I.e., if the neighborhood shows signs of changing, if people are moving out to new areas, or if new people are not buying - don't buy.

Real estate is an investment. Considerations like deducting the mortgage and whether renting or buying is cheaper at the moment ate outweighed within ~ 5 yrs.by the question of whether the property appreciates or not.

If you are reasonably certain that the neighborhood is stable, and, especially, if it prices are rising, you want to buy because Buying a starter home in a neighborhood where prices are rising is like stepping on a escalator. You rise up with the rising market.

Of course, you also take the risk that the escalator you've bought into may start to go down.

So if you love your community, Rav, neighborhood - by all means live there.

But only buy there if it seems likely that prices will stay stable, or go up.

amother

Lawngreen

Tue, Mar 24 2015, 12:29 pm

something to take in to account is are starter homes popular where you live? is there any way to expand it down the road either for you or a future buyer? Where I live, the impression I get is that small houses with the possibility of expanding are very popular in certain areas, additions are common. If there's no expansion potential there is often a lot less interest though.