The short answer—no. In fact, many think it’s a mistake not to. Buying a house while you’re young can be important in helping you achieve long-term financial success. You might not become the next real estate mogul, but making a home purchase can help set you up for financial health and stability.
Read on to learn more about why you, as a millennial, should consider home ownership and how to achieve this goal.
I Don’t Think I Can Afford It
And it sure feels that way for a lot of millennials. If student debt wasn’t already making your paycheck feel smaller, research shows this generation is now making 20 percent less than the baby boomer generation did at this age. Even though your generation is more educated, you have to deal with both school bills and a smaller paycheck. When baby boomers were in their 20s, they could snag respectable, good-paying jobs without a college education. Top that off with an increased cost of living (plus tuition up two-and-a-half times the inflation rate) and it’s easy to see why home ownership for millennials is so much more intimidating. The graph below highlights just how large the gap of homeownership is between these generations.
Even though Americans have seen home prices increase by an average of $40,000 since 1990 while their salary has only gone up by an average of $2,000, home affordability is not at all out of the question for millennials. Mortgage rates have plummeted during this time (from 10 percent to 4 percent). Adjusting for inflation, the average American might actually see a lower monthly mortgage payment.
Data from: Forbes
Why Buy Young
You’ve heard it before and you’ll hear it again: Buying a house is an investment. Instead of giving your hard-earned paycheck to a landlord, you can put it toward your own future. How nice does that sound? As your home’s value increases, so does your financial status. Houses in the New York market found their price double within just ten years (between 1990 and 2000). Buying a home at a young age gives you a head start in saving and investing for your future.
Uncle Sam looks kindly on those who decide to take the step of home ownership. The interest from your mortgage is deductible from your income tax. In certain situations, homeowners who decide to sell their property can avoid paying a capital gains tax (the pesky tax that comes along when you sell something for a higher price than you bought it for). There is a multitude of ways home ownership can help to lessen the burden of taxes, so be sure to understand how it can help your own situation.
Home ownership also comes with emotional benefits. You will gain a sense of pride knowing that you have accomplished something so big while being so young—just be careful not to let your bragging rights go too far. Owning a home means that you will be able to establish roots; not to mention, you’ll get to avoid moving every year or two, as is common for those who rent. Being settled in a home will allow you to establish relationships with your neighbors. You’ll feel more connected to your community and enjoy a sense of belonging.
Know How Much You Can Afford
How affordable your mortgage payment will be depends on a variety of factors. From the purchase price of the house to the property tax and insurance, your payment covers multiple costs. Take a moment to calculate what your mortgage payment would be to know what homes you can afford.
Not sure if those mortgage payments are taking out too much of your salary? The rule of thumb is to keep your mortgage payment at or below 28 percent of your take-home income. If you’re still curious as to what you can afford, you can compare your salary to what is needed for average homes across the country. You might be surprised—San Diego homes reportedly come at higher price than those in Los Angeles, Boston, and New York City.
Get Serious About Saving
And no, I’m not just talking about increasing your consumption of ramen noodles. Once you know what you can afford, you can start working toward your savings goal. Although a recent study reported that millennials (18-34 year-olds) have worse money habits than any other age group, there are plenty of ways you can create and maintain your own financial health. As a bonus, having a grip on your finances will make your offer on your starter house stand out from those of other millennials who may not practice your same money habits. People of all ages financially suffer from a lack of budgeting, bad spending habits, and not saving.
The solutions to these issues are simple and start with creating a budget. Simply take the time to outline how much you make and spend to get an overview of your current financial situation. Then, clarify what you should and need to continue spending toward. A simple way to break down your budget is to use the 50/20/30 rule. Use 50 percent of your income for necessities (housing, food, and transportation), 20 percent for your savings, and 30 percent for personal expenses (cell phone bills, a gym membership). If you haven’t used a budget before, this can be an eye-opening experience.
Talk to a Professional
Buying a home can seem overwhelming, especially if you’re young—but it doesn’t have to be. Connect with a financial advisor you trust. If you haven’t worked with one before, ask friends and family members if they have any recommendations. They can help you to build a budget plan that works for you. Next, talk to your local Mortgage Consultant to see if you prequalify for a mortgage or to figure out where you stand. This preparation will make purchasing a home much simpler (and I’ll mention it again—give you tons of bragging rights).