You can admit it. This is a fear of yours. This is most people’s fear. When purchasing a home, this is often the largest investment you may make in your life. What if it turns out to be a bad investment?
Let’s take a look at a friend of mine who purchased his home late in 2006 in Phoenix. In fact, he and his wife were in a bidding war and purchased the home for well above asking price. I mean, why not, housing prices never go down.
If you ask him he will tell you, “I LITERALLY bought at the very top of the market.” A few weeks after closing a couple ‘for sale’ signs started popping up in his neighborhood. And the strange thing was that they remained there.
Soon after, his wife and he realized they were stuck. They had their dream house but unfortunately their neighbors continued to sell and get foreclosed on and their home’s ‘value’ plummeted. They felt poor.
But they continued to pay their mortgage. Every month. Year after year.
Fast forward today. I recently spoke with him and he let me know that his house recently appraised for their original purchase price. Almost 7 years later their home is again ‘worth’ what they paid for it.
Some people might say this is a waste, after 7 years they are back to square one. But lets look at the numbers.
Lets imagine their mortgage payment was $1,500 per month. Early on in your mortgage term you are mostly paying interest and not a lot of principle. But you are also receiving tax benefits in doing so.
After 7 years they have paid $126,000 towards their mortgage while receiving a tax benefit on the interest paid. They were able to live in their dream home, and from day one they planned on living in it for at least 10 years.
If they would have let their home be foreclosed on they would have been forced to rent. At $1,500/month rent they would have paid their landlord $126,000 and received no tax benefit and have no ownership to anything.
So what’t the point of all if this?
My friend purchased his home at the very top of the market in 2006. Then his worst fear occurred. The market dropped. Not only did it drop, it collapsed. However, he was able to afford his payments and continued to make them. He still lives in his dream home and he has paid down is mortgage while values have creeped back up because over time real estate will go up in value.
In fact, they are now considering purchasing a new home and renting the current one out. (But thats another story)
You shouldn’t look at your investments from a day to day standpoint. You must keep your eyes looking forward. If you need a place to live it is better to own than to rent if you want to build wealth. Its as simple as that. Housing will always have booms and busts, but over time will increase your wealth better than almost any other investment.
Even if you buy at the worst possible time, if your time horizon is long enough it will pay off. And because you have to live somewhere, why not pay your mortgage instead of your landlord’s?
-Skyler Irvine, PLLC
Myriad Real Estate Group