Can You Afford Your Home?
For most Americans, their home is their single largest capital asset and also their largest yearly expense. The trouble is, they look at their home as a future asset and not as a present expense.
You should look at your home's cost today compared to the cost of renting. Here's how to do this accurately.
First, estimate your home's equity (net asset value): sale price minus realtor's commission, minus any capital gains taxes (you may owe none -- find out).
Second, pretend that you have just sold your house. The equity money is now in a savings account, ready to be invested.
Third, could you afford to buy your home back? Here is a calculator that will help you decide:
Assume a 5% down payment, a 30-year loan, and 6.15% mortgage interest.
Fourth, if you find that you couldn't afford to buy it back, you are living in too expensive a house.
If you justify living in it because of its future appreciation in value, you had better be sure that your local real estate market is still rising. If you are at the top of the market, you will lose money if you don't sell it soon. Your equity can do better in some other investment.
Are you really prepared to take a 25% hit on your home's price? What would that do to your net worth? Find out now.
If you think of your home as an investment, treat it as an investment. Go through this exercise.
If you think of it as a consumer good, go through this exercise. Make sure you can really afford to live in it.
If you play one goal off against the other, stop. Make up your mind: investment asset or consumer good?
That's my tip of the decade for some of you.
If you have questions on real estate, ask John Schaub. He runs my "Real Estate" department and forum. His book is the starting point: www.johnschaub.com.
This was my Tip of the Week for January 28, 2006. To subscribe to this free e-letter, go to the subscription box on my home page: www.garynorth.com.