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What First Time Home Buyers Need to Know?

Dated: May 16 2024

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My father and grandfather were in real estate practice together when I was young and one thing I heard them say repeatedly was “real estate prices always go up over time”. To their point, Nashville has seen decades of steady growth. In the last 5 years Nashville has experienced dramatic growth of 86% (Source: Realtracs).  This is scary to some potential first-time homebuyers, who feel like buying a house is now out of reach. It’s understandable too, however, the following are some things you should know.

You may not need as much downpayment as you think.

There are loans available that require as little as 3.5% downpayment with a credit score of 580. According to Realtracs, the median cost of a home in Nashville in April, 2024 was $528,200. A 3.5% downpayment for that amount is $18,487. If you deduct the $6,000 of assistance that first time homebuyers can get from a program like the THDA Great Choice, the downpayment moves to $12,487 and the ability to produce the required downpayment to purchase a home becomes more doable.

Home Buyers Have an Edge

Home buyers have a slight advantage in today’s real estate market with incentives coming from lenders and home sellers. With fewer loan applications flowing through their offices, lenders have created loan packages to help reduce interest rates for buyers to incentivize them to get a mortgage. Home inventory, which was around 1 month not long ago, sits at over 4 months, which has convinced sellers (including homebuilders) to provide an array of incentives for homebuyers to get homes under contract and out of inventory.

Assets Grow Fast and Build Wealth and Security

The leverage found in real estate helps increase the value of a cash asset faster and thus provides a good path toward financial security. For example, taking $30,000 of savings and placing it in a stock portfolio that increases by 6% per year for 5 years gives you $39,000.

Let’s say you purchase a house for $600,000 and use the same $30,000 as a downpayment. If the home appreciates over the next 5 years by 6% per year or 30% in total (actual growth in Nashville between 2019 and 2024 was 86%), the home would have a value of $780,000. Financially, there would be $180,000 of equity in the home and your personal balance sheet would list a net asset of $180,000, and this is without considering the principal payments that were made over those five years.  

Monthly Cost of a Mortgage is Fixed

Over the last several years in Nashville, the cost of buying a home has gone up significantly as has the cost of  renting. Unlike renters, homeowners are able to benefit from the increase in home prices by building equity and they are assured of a consistent monthly mortgage payment. Whereas renters generally see an annual increase in what they are paying monthly, which may or may not fit into their budget.

Homeowners also can deduct mortgage interest payments to reduce taxes payable to Uncle Sam. Further, interest rates are expected to go down over the next year and if/when they do, homeowners will be able to refinance to reduce their mortgage payments or possibly reduce the number of years left on their mortgage.

Wealthy People Buy Real Estate

Real estate is a good way to produce wealth to create financial security. The benefits of buying a home versus renting is a debate that will go on until the end of time, however all one needs to do is follow the money to understand the power of real estate to create wealth over time. This trail reveals that 90% of millionaires attribute the majority of the wealth to real estate and billionaires have the majority of their wealth invested in primary and secondary homes.  Finally, according to the Federal Reserve, in a 2022 study, the net wealth of a homeowner was $396,200 vs. a renter’s wealth of $10,400.

There are reasons for this and one of them is leverage. Real estate can be used as leverage for further investments, whether that is purchasing more real estate or investing in stocks, bonds, mutual funds, or even a business. Wealthy people have chosen the real estate path to a great degree to accumulate assets, and it’s hard to argue against their success.

At the End of the Day…

A house is much more than a collection of walls, floors, ceilings, and a roof. It is a place to call home, and for many, it becomes the family home where children are raised, and memories are etched with handprints in the concrete pad that was poured for the back porch 20 years ago. Beyond the emotional significance, a house is also an investment that will assist with the growth of wealth and financial security, which are important for the people living there.

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Patrick Pruett

I have a pretty unique background compared to most agents, which is one of the main reasons I’ve been able to help so many clients. One thing a lot of people don’t know is that I once had ....

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