Your Retirement Center

To Buy or Not to Buy?

That may be the question. The answer is both personal and financial.

If you're planning to buy a home, you probably have good reasons for your decision. It may be that you share the feeling that owning your own home is a key part of the American dream. But there are also financial issues involved in buying real estate that you need to consider as well. From one perspective, a home is an investment, maybe the single largest one you'll ever make. Like certain other investments, real estate has the potential to increase in value over the years, so that you can sell it for more than you paid. But unlike investing in stocks, bonds, variable annuities, and mutual funds, which you buy as a way to achieve your financial goals, most people consider owning a home as an end in itself.


REASONS TO BUY There are strong emotional reasons for buying a home - and potentially stronger financial reasons. Owning can help you feel grounded, and part of a community. It can provide a sense of accomplishment and a place to build family traditions. Often, you have more space than you would in a rental unit that cost the same amount. And owning can save you money. That's because you can usually deduct up to $10,000 in mortgage interest you pay on your primary home.

REASONS TO RENT On the other hand, you might decide to rent rather than buy a home for practical and financial reasons. If you're on your own, for example, getting together a down payment and managing the expense of a mortgage, taxes, insurance, and upkeep may put too great a strain on your budget. And having all your assets tied up in your home has serious drawbacks. Among other things, it limits your ability to invest enough to meet the other goals that are important to you. Another reason to rent is a job that keeps you on the move or requires you to relocate periodically. It's not always easy to sell when you're transferred or change jobs. While your employer may help out with the cost of selling one home and buying another, you can't count on it. And the most expensive part of buying is the one-time, up-front cost.


If your parents or grandparents are willing to help you out with buying a home, each of them can give you a tax-exempt gift of up to $15,000 a year. It's a case where a timely gift may make a lot more sense than an inheritance. Be careful, though. Gifts over the limit may be taxable for the giver. And loans from family members earn imputed interest if the lender doesn't charge you any - or enough - to borrow. That means he or she has to pay income tax on the interest that normally would be paid even though you didn't pay it. One exception occurs when a parent's loan enables a child with no investment income to buy a home.

HOW BUYING WORKS There are usually three distinct phases in buying a home: accumulating the down payment, finding a mortgage, and building your equity.


Generally you need a down payment of at least 10% and sometimes as much as 20% of the purchase price available in cash in order to buy. But you can investigate some federal and state programs, like those run by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and certain community groups, which require much smaller down payments. You can also check the website of the US Department of Housing and Urban Development at


When you have enough for a down payment, you can begin looking for a home and a mortgage loan. That's a long-term loan that provides the money you need to buy the home. You pay the loan back, usually in monthly installments over a 10- to 30-year period.


When you've arranged your mortgage and bought your home, you gradually build your equity, or ownership, by paying off the interest and principal of your loan. In most cases your monthly payment will also include enough to cover the real estate taxes and insurance on the property. Those costs are sometimes referred to as PITI, or principal, interest, taxes, and insurance.
INVESTING FOR A DOWN PAYMENT If you're planning to buy your first home, you'll have to decide how to invest the money you're planning to use for a down payment. Timing is a major consideration. The sooner you plan to buy, the fewer risks you may want to take. You probably don't want to be in a position to have to sell investments if their price drops suddenly, or risk having to postpone your plans to buy. On the other hand, the more price-stable an investment is, the less you'll earn on it. One technique advisors suggest is to split up the money you are accumulating, putting part in stocks, and the balance in more conservative interest-bearing investments that will mature about the time you plan to buy. You could also set goals for equity investments, in either price gain or total return, and sell if an investment reaches that level. That's a different approach from buy-and-hold investing, but it could help you to build your down payment. For example, if you buy a stock whose price increases 15%, you could sell, reinvest the principal in another stock, and put your profit in a certificate of deposit (CD) or other stable value account.


If you're turned down, ask why. Find out which credit reporting company the lender used to check on your credit history and request a copy of that history from the company. It should be free of charge since you've been turned down. If there are any obvious errors, follow the instructions on the report to have them corrected and check up to see that the changes have been made. If the negative information is correct, and your credit history has flaws, at least you'll know the factors that may be blocking your application and can begin to strengthen your credit credentials. Sometimes you can make out better applying to a bank or credit union you already have a relationship with or using a mortgage broker who specializes in finding interested lenders. The broker will charge a fee, so you'll want to be sure that cost is necessary. You might check out online mortgage sources. And, you might consider a private arrangement with sellers who would be willing to finance the purchase - although you don't want to do that without the advice of a real estate lawyer you trust.

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Your Retirement Center