Tips for millennial homebuyers

Low interest rates and rising rents can make home buying a smart investment.

Advice to young potential homebuyers from bankers and other lenders might go something like this:

Dear Millennials,

We know you have college loans to pay back, you like your apartments because they’re close to restaurants, clubs, and shopping, you’ve seen your parents’ generation lose jobs and struggle through the Great Recession, and you don’t have a lot of money for a down payment. Oh, and you’re trying to save for retirement, too.

But we’re here to tell you that buying a home can be cheaper than renting and has the added benefit of providing tax breaks. Looking ahead, a home can be one of the smartest long-term investments you can make right now, because interest rates are relatively low and home ownership builds wealth over time.

True, there are costs involved with buying a house and coming up with a down payment might seem daunting, but there are options for many financial situations. So, run the math and consider getting into the home market. If nothing else, you’ll end up with a clear view of your finances and whether home ownership is in your future.

As economists across the nation debated in recent months whether the Federal Reserve would raise interest rates soon or wait until 2016, many millennials stepped into the housing market, taking advantage of the ability to lock in mortgage rates at levels that remain historically low. However, others are reluctant, concerned about affordability, strict mortgage lending rules, and job stability in a slow economic recovery.

Despite that split, the number of millennials buying homes is growing rapidly — they have surpassed Gen X as the largest segment of homebuyers. Statistics from the National Association of Realtors show that millennials comprised 32% of the U.S. housing market in 2014, an increase from 28% in 2012.

Among the driving forces for millennials who do decide to buy a home are rising rents and relatively low interest rates, at least for now. Some economists believe that October’s job growth increases the chance of a rate hike in December. Although the Fed does not directly control mortgage rates, the rate it sets for banks’ own borrowing tends to quickly affect the mortgage rates banks offer to customers. Meanwhile, there’s been an income gap for renters generally. Over the past five years, rent increases typically have been at 15%, compared to an 11% increase in income for renters, according to the Realtors’ group.

Here are a few benefits of owning a home:

Building wealth — Home ownership has been near the top among financial planning tools for several generations as least, but widespread turmoil in the housing market during the Great Recession caused many potential homebuyers to stay on the sidelines.  A home you own can be a valuable asset and a key portion of your overall wealth as long as you buy a home you can afford. Stretching your credit by buying “too much home” can lead to financial problems.

Building equity — Each monthly mortgage payment reduces what you owe on your home and increases your equity — the amount you can sell the home for, minus what you still owe. Most mortgages are designed to increase the amount of principal that is paid over months and years; it’s at the lowest point at the first payment and highest on the last.

Tax deductions — Under current tax rules, homeowners can deduct mortgage interest when calculating income taxes, a huge benefit especially during the early years of owning a home when the interest portion of your payment is higher. Homeowners also can deduct real estate taxes, and during the first year of ownership can deduct points or origination fees paid at the time of purchase. In addition, homeowners can deduct interest paid on a home equity loan or line of credit.

Capital gains tax exclusion — If you buy a home as your primary residence and live in it for more than two years, when you sell the home, profits of up to $250,000 for individuals and up to $500,000 for couples will be excluded from capital gains tax. Although it’s true that many homes lost value during the housing turmoil, the market has stabilized, making it possible for gains over time. The latest Standard & Poor Case-Shiller home price index shows prices are up about 5% year-over-year for residential real estate in 20 metropolitan regions across the U.S.

Once you decide to take the plunge into the housing market, it’s important to know your financing options and to be prepared to act quickly when you find a home you’d like to buy. Here are some tips:

• Determine “how much house” you can afford — Talk to mortgage lenders to help you decide how much you can borrow and how much you should spend for a home because they are not necessarily the same. You should consider the cost of the mortgage along with your other monthly expenses and your overall financial goals, a point especially important for first-time homebuyers.
• Develop a relationship with a lender in advance — Working with a local lender not only can streamline the process but might pay off with added benefits such as a better rate on your savings account or help with your overall financial planning.
• Get pre-approved for a mortgage — If your financing is in place, your offer might be accepted more quickly or instead of another offer from potential buyers who do not yet have approval. 

Dave Bednarski is a sales manager in Brookfield and Brian Showers is a sales manager in Madison for Wisconsin Bank & Trust, Member FDIC and Equal Housing Lender. NMLS#553208

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