Introduction:
You’ve all seen plenty of posts with blanket statements and cliches about the financial benefits of homeownership versus renting. The truth is that it depends on a wide variety of factors such as the current state of the market, your financial situation and the future you see for yourself/family.
In an environment of higher interest rates and low home sales, many in this industry are desperate to push you into a home regardless of whether it’s in your best interest. At Murray Mortgage Solutions, we take a much more thorough approach, analyzing the financial impact of each mortgage so our clients can feel fully confident in their decisions.
How do I determine the financial impact of real estate ownership?
Cash Flow Statement
Balance Sheet
Buy VS Rent Calculator
Loan Senario/Amortization Tool
Interest Rate Comparison Tool
Tax Planning and Analysis
Future Value Calculations
Risk (Insurance) Analysis
Cash Flow Statement:
The Cash Flow Statement helps identify your net cash flow to determine if pursuing real estate makes sense financially. It identifies all cash inflows and outflows and breaks them down into various categories. Creating an accurate cash flow statement is the key to financial success, regardless of your goals.
Balance Sheet:
The Balance Sheet determines your net worth by comparing your assets and liabilities. It also provides a general idea of how you're diversifying your portfolio. One glance at your Balance Sheet can often visualize better than anything whether it makes financial sense to pursue real estate or not. It can also help determine if you should pay off (or reduce) certain debts in preparation for buying the home.
Buy VS Rent Calculator:
When Buying a home, you'll require a large initial investment for the down payment and closing costs. You'll also pay more over time for things like insurance, property taxes and repairs. However, generally speaking, you'll also be building equity, owning an appreciating asset, and may receive tax benefits. Once you sell the home, you'll lose a percentage of the gains due to the selling costs however you won't pay long term capital gains tax (up to the IRS limit) unlike the renting example below.
When Renting, you could instead place that large initial investment and the money you save each month, into the stock market. You'll also avoid homeowners insurance, property taxes and repair costs. When you're ready to leave your apartment, there won't be selling costs. However, you're not gaining equity, there's no capital appreciation of Real Estate and you don't receive any potential Real Estate ownership related tax benefits. Also, once you sell the securities placed in the stock market, you'll likely be subject to long-term capital gains tax.
Loan Scenario/Amortization Tool:
This tool helps analyze how different loan scenarios will impact your Debt to Income (DTI) and Loan to Value (LTV) Ratios which are the two most important factors for mortgage qualification. You'll be able to instantly see the financial impact of different purchase prices, loan amounts and interest rates which will identify the best route to take. It will also help us forecast any potential issues we'll face if the home doesn't appraise for as much as the purchase price.
Interest Rate Comparison Tool:
With this tool we can compare the financial impact of different interest rates and whether an Interest Rate Buy-Down (AKA Points) is beneficial or not. Buy-Downs are essentially paying extra cash today for a lower interest rate that will save you money over the life of the loan. We'll identify how long it will take for you to earn back the cash you paid through the monthly savings in interest. The tool also shows how important the interest rate is towards a wide variety of financial goals, not only how it impacts your monthly payment.
Tax Planning and Analysis:
Tax Planning and Analysis will be done in a variety of ways as you provide the required information. The more details you provide, the better we can determine the various implications.
The first aspect is estimating your after-tax cash inflows and outflows used in the Cash Flow statement. Since taxes become due (or are refunded) in lump sums annually, we'll want to prepare for this in advance by converting it to an estimated monthly figure. The second aspect is determining if real estate ownership will actually provide tax advantages or whether you'll still elect the standard deduction. Lastly, we can look for any additional tax reduction strategies based on your unique financial situation.
Future Value Calculations:
With the results we find in the Rate Comparison tool, we can see how your interest savings would grow if you invested them each month over the life of the loan. We'll also use Future Value calculations in the Rent VS Buy Calculator to predict what you could earn by renting instead of buying (see "Rent VS Buy" above). Lastly, Future Value calculations can be used to determine how much of your available cash should be used towards the down payment versus how much you should invest elsewhere.
Risk (Insurance) Analysis:
As we're building a picture of your finances, we'll determine whether you have adequate insurance. This is often the most overlooked aspect but it's crucial to your long-term financial goals, including real estate ownership. If you're underinsured and something happens that impacts your income, even a few missed mortgage payments can be devastating.
Conclusion:
Determining the financial impact of real estate ownership is far more complex than many believe. What we cover in this article doesn't even go into other important implications such as preferred standard of living, job flexibility, family plans, retirement goals, ETC.
You should be preparing to buy your first home at least 3 years ahead of time yet this is rarely the case. Our goal is to eliminate the false perception that you don't reach out to your Mortgage Broker until you start looking for houses.
Regardless of where you're at in your life, we'll sit down and determine the best strategy to meet your goals. Don't make this life altering financial decision to buy a home simply because society tells you to. Work with someone you trust will guide you in the right direction.
Disclaimer: The information provided in this article is for educational and illustrative purposes only and should not be considered financial, tax, or investment advice. All calculations and examples are hypothetical and are based on general assumptions that may not apply to your specific circumstances. Always seek professional tax advice from your Accountant/CPA.