Laura answers a listener's question about tips and strategies for buying an affordable home in a tight housing market.
Laura answers a listener's question about tips and strategies for buying an affordable home in a tight housing market.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today's topic comes from Lisa, who says:
"I'm 29 years old and getting married this summer. My fiance and I have good jobs and contribute a little to our 401(k)s. We're renting a place but would like to buy a home someday. Since we don't have much savings for a downpayment, should we stop putting money in our retirement plans and put it in savings instead? Or is trying to buy a home that’s affordable right now just too difficult?"
Thanks for your question, Lisa! Buying a home is the largest purchase that many people ever make. This post will review how buying a home might fit your overall financial goals and tips for making it as affordable as possible.
I appreciate you downloading episode 921 of the Money Girl podcast! I'm Laura Adams, an award-winning author, money speaker, on-camera spokesperson, and founder of The Money Stack, a Substack newsletter. You can subscribe for free or become a paid member with access to live educational events!
You can learn more and connect with me at LauraDAdams.com. That's also where you can email your money question, learn more about my books and courses, and sign up for The Money Stack. You can also record a brief question or comment on our voicemail line at 302-364-0308.
Should you rent or buy a home?
If you're like Lisa, wondering if becoming a homeowner is still a worthwhile goal as prices and mortgage interest rates rise, I'll review some of its primary pros and cons to consider. Then, we'll discuss how to buy an affordable home if and when it's right for you.
Here are five reasons why buying a home can improve your life and finances.
1. You build equity.
Home equity is the difference between a property's market value and what you owe on it. For instance, if your home gets appraised for $400,000 and your mortgage balance is $300,000, you have $100,000 in equity. You could sell the property, pay the mortgage, and walk away from the deal with about $100,000 in your bank account.
When you have a fixed-rate mortgage, each payment is made up of principal and interest in amounts that change monthly. Therefore, each payment helps you grow a little richer as you reduce the outstanding loan balance by a slightly larger amount, known as amortization. If your home's market value is steady, you increase your equity with each monthly mortgage payment.
RELATED: 7 Strategies for Paying Off Your Mortgage Early
2. You typically get appreciation.
Many areas of the country saw huge price appreciation during the pandemic. While housing inflation has slowed, prices are still rising. That's great for homeowners because it boosts their equity and resale value. For instance, if you buy a home for $400,000 and its market value increases to $550,000 over time, you have $150,000 additional equity.
Historically, real estate has been an excellent long-term investment. But there's no guarantee that a home's value will go up or appreciate as quickly as you'd like. For instance, you probably lost money if you bought a home in 2007 and had to sell it during the 2010 recession.
However, according to the Case-Shiller U.S. National Home Price Index, home prices in January 2025 were up about 4% over the prior year. But if you bought a home at the beginning of the pandemic, the appreciation since then has been an average of 53% nationwide.
3. You get an inflation hedge.
When you have a fixed-rate mortgage, your payment gets locked in for the term of your loan, such as 15 or 30 years, no matter what happens to interest rates or the economy. Rents may increase during periods of inflation, as we've seen recently. But a fixed mortgage can't go up. So, owning a home becomes more affordable when prices rise.
4. You may have a lower monthly payment.
While home prices continue rising, it can still cost less than renting in many areas of the country. That's especially true if you don't live in a big city like New York or San Francisco, where home prices are notoriously expensive.
For example, buying a $400,000 home with a $300,000, 30-year fixed-rate mortgage charging 7% interest would make your monthly payment nearly $2,000. Even with additional costs such as homeowner's insurance, property taxes, and private mortgage insurance (PMI), it can be less than renting a comparable home.
5. You get tax benefits.
Homeownership comes with tax benefits that reduce your annual tax liability. The mortgage interest tax deduction allows you to deduct a limited amount of interest paid on a primary and secondary residence. You can deduct interest paid on up to $750,000 of mortgage debt if you file taxes jointly or up to $375,000 if you file taxes as a single.
Another significant tax perk for homeowners comes when you sell a home, which is the capital gains tax exclusion. It allows you to avoid paying tax on up to $500,000 of profit if you file joint taxes or $250,000 as a single. However, you must have lived in the home for at least two of the previous five years before the sale to qualify for the exemption.
RELATED: 7 Ways Buying a Home Cuts Taxes and Improves Your Finances
Now, let's consider the benefits of renting a home. Here are five reasons being a renter can improve your life and finances.
1. You pay less upfront.
A massive pro for renting is not having many upfront expenses compared to buying a home. Mortgage downpayments vary depending on your income, credit, desired property, loan type, and lender but typically range from 3% to 10% of the purchase price, at a minimum.
In addition, you also must make an earnest money deposit with your purchase offer and pay closing costs, such as lender fees, attorney fees, appraisal, survey, inspections, title insurance, homeowners insurance, and other expenses customary in your area.
2. You may have a lower monthly payment.
As previously mentioned, where you live is a significant factor in whether renting or owning a home costs less. However, renters get to skip many expenses that homeowners can't, like repairs and maintenance.
If you live in an expensive city, renting may be much cheaper than buying a comparable property.
3. You have flexibility.
Being able to pick up and go for a promotion with your company or family's needs could go a long way toward improving your life and finances as a renter. If you want to pull stakes as a homeowner, you're usually stuck until you sell the property or find a reliable tenant to help you pay the mortgage. Depending on the economy and housing market, that could be easy or difficult.
4. You're protected from market downturns.
Recessions and real estate bubbles may not affect renters as much as homeowners. Renters may come out ahead if rents go down when the economy struggles.
5. You may get better amenities.
Tenants with amenities like a clubhouse, pool, exercise room, theater, or rooftop lounge could pay less than owning a comparable home or paying for them separately.
Even renting a home with lots of square footage, a garage, a pool, and a large yard could cost less than buying it. So, the extras you get as a renter can significantly contribute to a lifestyle you enjoy that wouldn't be available to you as a homeowner.
How do I save for a home downpayment?
Like many issues in personal finance, the answer to whether you should be a homeowner is "it depends." Your financial situation, goals, and lifestyle are unique, and there's no right or wrong answer.
If you decide to become a homeowner, a good rule of thumb is to be sure you'll live there for at least five years. That's because you never know how long it could take to sell. If buying a home has more advantages than renting, and you're willing to put down some roots, owning an affordable home is a terrific goal.
But preparing your finances to buy a home isn't easy and could take years. As Lisa mentioned, you likely have other goals, like retiring. You also may need to build an emergency fund, buy a car, or take a vacation. Where does buying a home fit in?
Start with your most critical goal, which for most people is funding retirement. If you regularly invest about 10% of your gross income in a retirement plan, such as a 401(k), or max out an individual retirement account (IRA), you're in a good position to begin saving for a home.
If you don't have a healthy emergency fund, you could temporarily reduce the amount you invest for retirement to 5%, but it's critical not to stop investing. Plus, a home purchase should never deplete your savings. Once you become a homeowner, it's even more crucial to have a cash cushion for unexpected expenses, like home repairs not covered by insurance.
If you can continue investing 10% or more of your income for retirement and save for a home simultaneously, that's ideal. Yes, that means it might take longer to accumulate enough, but you'll be in a far better financial position when you do buy a home.
RELATED: Am I saving enough for retirement?
How do I find an affordable home to buy?
If you're unsure how much money you’ll need for a downpayment and closing costs, speak with an experienced real estate agent in the area where you want to live. They can help you understand the price of homes, insurance, property taxes, homeowners association dues, typical closing costs and recommend mortgage pros and other service providers.
A knowledgeable agent is your greatest asset in any real estate deal. They can help you understand a seller's priority, such as getting the highest price, delaying a closing, leaving furniture, or getting a quick sale. Use a seller's motivation to negotiate a win-win transaction.
To get the least expensive financing offer, make sure your credit is in good shape before house hunting. For instance, don't open new credit cards or loans for at least six months before you plan to apply for a mortgage. The higher your credit scores, the better your mortgage terms will be.
Your leverage to negotiate the price of a home depends on what's happening in the local market. If it's hot with many buyers and few homes for sale, getting a "deal" may not be possible.
However, if you're willing to renovate a property, consider buying a home that's discounted because it needs repairs, is outdated, or has an undesirable floor plan. Just be sure to get several estimates from contractors to understand if a discount is significant enough to cover your future costs.
Remember that submitting an offer is not a commitment to buy a home. Most purchase offers include contingencies, like a satisfactory home inspection, pest inspection, seller disclosure, appraisal, and mortgage. You can back out without penalty during the due diligence phase if you find something unsatisfactory about the property covered in your contract.
How do I finance an affordable home?
Before you begin touring homes for sale, make contact with several mortgage lenders or brokers for preapprovals. Brokers have access to multiple lenders and can connect you with the best lender for your situation. Submitting preapprovals with a purchase offer can give you a leg up over other interested buyers.
The mortgage down payment you'll need depends on the type of loan you get. For instance, an FHA loan allows as little as 3.5% down, which is excellent when you have limited funds. However, an FHA loan may charge a higher interest rate than other options.
A conventional mortgage may charge a lower interest rate but typically requires
at least 10% down. If you pay 20%, you avoid paying PMI, which could save hundreds monthly–so that’s a good target.
How do I save on homeowners insurance?
When you have a home under contract, it's time to shop around for homeowners insurance. An easy way to cut your premium is by raising your deductible. That means you'll need more savings and must cover smaller expenses out of pocket.
Many insurers offer discounts for safety features like security systems, storm-proof
windows, hurricane shutters, and newer roofs. You can also pay less when you bundle policies with the same company, such as your home and auto insurance.
In addition, being married, working in certain occupations, living near a fire station, having good credit, and not smoking can cut home insurance costs, depending on what’s allowed in your home state. Ask your insurance broker what discounts are available so you get as many as possible.
LISTEN ALSO: Home and renters insurance–5 things you should know
What should I expect at a home closing?
You should receive your official closing statement a day or two before a home closing. Review it carefully to familiarize yourself with the seller's and buyer's fees and get any errors corrected immediately. Make sure the statement reflects everything you negotiated with the seller and discussed with your lender and home insurer.
If buying an affordable home is one of your financial goals, preparation is key to achieving it. Rushing to buy a home too early is a recipe for financial stress. But if you slowly build your credit, savings, and knowledge about home-buying, you'll be in the best position to become a homeowner when the time is right.
Before we go, here's a quick reminder to subscribe to The Money Stack, my Substack newsletter, when you visit LauraDAdams.com. It's filled with money tips, tools, news, challenges, and things I enjoy! You can subscribe for free or become a paid member with access to live educational events.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Brannan Goetschius is our director of podcasts, Holly Hutchings is our digital operations specialist, Morgan Christianson is our advertising operations specialist, and Nathaniel Hoopes is our marketing contractor.