Owning your own home was always the cornerstone of the American Dream, but buying seems to have become unattainable for post-recession millennials. By not purchasing property, however, millennials may lose out on some of the advantages of home ownership.
Just slightly more than one-third of millennial adults are currently homeowners, according to the U.S. Census Bureau. The tide among this age group, born roughly between 1982 and the early 2000s, is beginning to turn however, according to the National Association of Realtors. The association found that one-third of homebuyers during the first quarter of 2014 were in this age bracket. If you're a millennial looking to settle down, here are five factors to consider.
1. The costs of ownership
When you rent, your costs are fairly straightforward: security deposit, rent, renters insurance, any utilities not included in the rent and possibly Internet, cable and phone. However, homeownership costs are much different.
"I'm thinking a lot of millennials are going to be really surprised at cost of ownership," says Dana Twight, certified financial planner at Twight Financial Education, based in Seattle. "If you're struggling to make a mortgage payment and you have to pay to have your furnace fixed ... then you have to pay off student loan debt, and at that point you're like, I don't have an emergency fund anymore."
Homeownership expenses start with the mortgage and include much more:
- Mortgage: If you finance your home, your main monthly payment will be your mortgage, which goes toward both the principal and interest on the loan. The mortgage rate will determine the interest you pay. The rate you can get will depend heavily on your personal finances, lender and current market conditions. One benefit of a mortgage is it's often set at a fixed rate, so your payment will never change, unlike renting where you're subject to more price fluctuations.
- Hidden Fees: You might end up with some hidden fees at closing, says Twight. "Sometimes the lender will throw in a 1% fee for something, so you need to give yourself enough time to review your agreement. There are things in there that may add up and increase the cost of the loan."
- Utilities: You'll incur charges for utilities or services you may not be used to, such as water or trash pickup in addition to gas, electric, cable, Internet and phone.
- Insurance: If your down payment is less than 20% of the value of the home, you'll have the additional cost of private mortgage insurance (PMI) to pay your lender each month. You'll also need homeowners insurance. The cost for this coverage will vary according to the age of your home, your credit risk and other factors. You'll also have to pay extra for hazard insurance if you live in earthquake, tsunami or volcano zones. Those in flood-prone areas will have to get federal flood insurance.
- Maintenance: Maintenance and repairs for plumbing, appliances and the like that your landlord used to cover are now your responsibility. Depending on where you purchase, you may also have homeowners association or condo dues, too.
- Property taxes: Your property taxes will also vary according the value of your home and where you live. Even if you think you're in a low-tax area, you need to factor into your overall budget the strong possibility that those taxes will increase.
2. What equity can do for you that rent can't
Unlike renting, homeownership enables you to build equity in your home and create financial security. Home equity is your share of the value in your home, which builds as the home appreciates. Building home equity is an investment and can make it easier for you to get a more desirable second home. It can also be used as collateral for loans you may want in the future, such as for a business or property renovations.
"You are building wealth," says Anthony Humpage, CEO of Tigrent Inc./Rich Dad Education. "While the cash outflows of home purchase make a home purchase a liability (since you have to pay out cash every month) property ownership combined with a low, fixed-rate mortgage offers you a real hedge against future inflation."
3. Short term vs. long-term commitment
Ask yourself if you're ready to make a long-term commitment of home ownership and consider how long you're planning to stay in the area.
"Many of us aren't ready to commit to one location for more than a few years," says Ryan Donovan, a Vermont-based real estate agent who is also a millennial. He adds if you plan to stay in a location less than five years, home ownership may not make sense.
The five-year time horizon is especially needed if you want to see a return on your investment in the house, including the purchase, broker fees, closing costs as well as any renovations and general upkeep.
"Many people are unsure about what their living situation might look like, given expanding family size or job uncertainty, so renting is often the smarter decision," says Philip Lang, co-founder of Suitey, a New York-based tech-focused brokerage.
4. What your priorities are now - and how they may change
Figuring out your priorities for your lifestyle and family is one of the best ways to figure out if buying is right for you.
"If a family purchases a home, it's good to have an understanding of why you're buying the house in the first place. Are you keeping up with Joneses? It is because your family always owned real estate? What are your job prospects?" asks Twight.
Melinda Kibler, a millennial and certified financial planner with Palisades Hudson Financial Group in Florida, says rental properties may offer a set of amenities that home ownership doesn't. "If a buyer enjoys amenities that a rental apartment building offers, such as a gym, pool, or concierge service, they must attach a price to this and factor it into the value, versus purchasing a home where they may lose these amenities," she said.
Buying may be a good option, for example, for those who have children or plan to do so in order to have a fixed location for public school boundaries. "Schools tend to drive many real estate markets, and you tend to see a strong correlation between school achievement and a high percentage of home ownership," says Tim Proschold, a real estate broker and sales manager for California-based Sereno Group Real Estate.
Overall, you need to consider the "X-factor" in the area where you'd like to live, says Adam Walden, a real estate agent with Coldwell Banker Residential Real Estate based in Florida. "Every neighborhood is different. It is important to understand the factors that tie in with value," he says. "In some places, it may be a premium to have a large back yard, while in others it is important to have an abundance of amenities."
5. Your current credit and debt situation
Even if the desire for home ownership is strong, your financial situation may not be.
Twenty percent of all recent homebuyers delayed home purchases due to outstanding debt, the National Association of Realtors found earlier this year. For 20% of millennial buyers who took their time saving for a down payment, 56% said student loan debt was their biggest obstacle.
Your credit score and existing debt will affect your mortgage and insurance rates, or may affect your ability to get a mortgage loan altogether. Consider taking steps to increase your credit score before purchasing a home to get the best rates and working to lower your debt to secure better rates and to lower your overall monthly costs.
Millennials may not idealize the traditional house and white picket fence as other generations have, but it doesn't mean homeownership is out of reach. Even if your credit score isn't up to snuff or the costs seem too high right now, you can get your finances into better shape before you try to buy your first home.