One piece of wisdom that you hear more often than not: “Patience is a virtue.” This is especially true when it comes to major purchases, such as a home or automobile. After all, you should never rush when spending that much money.
But “being patient” is very different from simply “taking too long.” A 2016 study showed that homeownership in America shrank to 63%, according to the most recent numbers. One demographic in particular was buying homes at a rate much lower than other age ranges: 18 – 34 year-olds. This was for a number of reasons. One, people tend to buy homes when they get married and have children. As millennials are getting married and having kids at a higher age than the generations before, they are also buying homes at a later age.
That all makes sense. So what’s the harm?
As it turns out, buying homes later could be one of the biggest risks to the retirements of Millennials. No one should rush to buy a home if it is financially irresponsible, but you should at least develop a strategy to buy within the reasonable future. Here are four ways why buying a home is great financial insurance for the long run.
1. It’s a forced form of savings.
Have you started a savings account yet? If not, it’s probably for the same reason why you haven’t bought a home: That’s a lot of money to put aside at one time!
You already know the benefits of investing money into a savings account. Over time, interest boosts the value of what you set aside, serving as a safe investment for further on down the road (often retirement). What few people realize is that homes serve a similar role as savings accounts. This is in the form of equity; assuming you take care of the home across the life of your mortgage, it will eventually be worth a significant amount more than you paid for it. You’ll be able to sell that home and downsize, leaving a nice chunk for retirement, or you can tap into your equity while you continue residing there.
One benefit of a home over a savings account? You can live in a home.
2. You earn while you pay off your mortgage.
Paying rent for an apartment is a great idea for those currently saving for homeownership. Doing so for too long can be harmful for your financial future, however.
Any money you put toward housing can be considered an investment. When you put money into paying off your mortgage, you receive returns in the form of equity. You don’t want to access it right away, but experts suggest that the average home will increase in value 4.2% per year from now until 2023. So you get a 4.2% return on investment for a mortgage…compared to a 0% return for rent (your landlord will be doing quite well from your “investment,” however).
3. It’s among the safest investments.
When investing for your future, there are two factors to consider: return and risk. Obviously buying stock in the next Amazon.com is a great idea…the returns on your investment will make you a millionaire. The issue, of course, is that no one guarantee if a stock will pay out or fizzle out. That’s the risk.
Savings accounts are the safest investment. You put money in, and you get a steady return, sometimes for a small fee. There is a risk in buying a home, but it’s a predictable one: that you won’t be able to afford your mortgage payment. If you plan wisely, this will hardly be a risk at all. And again, the average return in equity for the next five years will be around 4.2%…a lot more than the 2% you can expect from a savings account.
4. Rates will be going up soon.
As the Federal Interest Rate rises, the interest rate for getting a mortgage will increase as well. Rates have recently crept above 5% for a conventional 30-year loan, and could increase in 2019. Buying sooner than later will help secure a better rate. Granted, renting while you save up is always wise. But you can certainly overdo it: Interest rates won’t be the only thing rising next year. Rent prices will increase as well, and again, that’s a cost that you won’t get any return from.
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