There are several benefits to buying a house in your 20s, including certain tax benefits and the opportunity to build equity in your home early on. However, the right time to buy a house depends entirely on an individual’s personal obligations and financial situation, not their age.
Buying a house might be considered by some as the ultimate sign of financial independence. Though not many people in their 20s can afford to buy a home, those who can should consider several factors before completing their first home purchase. Even if the monthly mortgage payments are in line with their current rent, there are costs other than the monthly mortgage payments that need to be considered.
While there are a variety of expenses associated with being a homeowner, for many people, the potential benefits make the costs completely reasonable. This is especially true when you consider how owning a home can improve your quality of life.
Reasons young adults would want to buy a house
Despite the expense of buying a home, there are many benefits to being a homeowner. One of the most attractive prospects of purchasing a home is the general stability and privacy that comes with home ownership.
Building equity through mortgage payments
Buying a house in your 20s can be a fantastic way to start building equity in your home through your monthly payments. Home equity is essentially the value of your house minus what you still owe on it.
As you continue to make monthly payments, you will eventually pay down the debt on your mortgage. Ultimately, your home will be worth significantly more than what you owe on the mortgage. Using this equity, you can take out a home equity loan or home equity line of credit (HELOC) for any surprise repairs or desired additions, which may further increase the value of your home.
Benefits of home ownership at tax time
There are a few potential tax benefits to homeownership. For one, you can deduct the portion of your mortgage payments that apply to your loan’s interest. However, generally, only the mortgage interest is deductible.
The ability to borrow against your house in the future
Whether you made a large down payment or if you have just been making consistent or extra payments towards your mortgage, you will have built some equity in your home. After you build enough equity, you may want to consider getting a HELOC or home equity loan.
A home equity loan is a loan that uses the equity you have in your home as collateral. These loans generally have better interest rates than other forms of consumer debt. Even though they generally have a worse interest rate compared to mortgage rates, home equity loans tend to offer significantly lower interest rates compared to credit cards.
Reasons young people might not want to go house hunting yet
There are a few big reasons why buying your first house at a young age might not be for you. The main problem applies to nearly every potential homeowner and is also the obstacle discussed most often. Buying a house is incredibly expensive. The significant expense of purchasing a home is probably why the average age of a home buyer is usually well past 35.
The second serious concern is generally more applicable to younger folks but can equally apply to just about anyone. Buying a house forces the homeowner to settle down in a specific location for the foreseeable future. Since most young adults are just beginning their professional careers, they may want the ability to relocate or travel for work, which becomes much more difficult to do once they own a home.
In fact, less than 50% of millennials currently own a house according to the most recent census data. Homeownership rates in 1982 were higher for Americans under 35 years of age (and 35 to 44) than in 2022. However, the number of millennials purchasing homes has been trending upward over the last few years.
Major costs of buying a home
There are several expected costs that will be part of the house buying process. The down payment, the monthly mortgage, and closing costs are all expenses that will need to be accounted for. Then there are all the unexpected expenses such as necessary repairs needed to ensure the home remains in a livable condition.
Generally speaking, homeownership costs more than renting, even if the mortgage payment is less than what the monthly rent was. However, despite the extra expense, homeownership is one of the most common ways to build wealth over the course of your life.
A wonderful house doesn’t mean its the right location
Since many people in their 20s are just beginning to establish themselves in the world, what they want out of a property could easily change over a decade. Moving for work or visiting family members can become a lot more complicated if your once-great location is now across the country from where you need to be.
Things to consider when buying a home
The house buying process is just that; it’s a process. Even if everything goes smoothly, you can expect buying a house to take several months. For potential buyers checking the market for a bachelor(ette) pad, a single-family home, or their dream house, the cost of buying a house will likely become the underlying factor in all personal finance decisions for the foreseeable future.
Will your credit score qualify for a mortgage loan?
If you believe you’re financially ready to buy your first house, begin by making sure that your credit report and score are healthy enough to qualify for a mortgage loan. This is especially important as your credit score impacts your mortgage’s interest rate. If your credit score isn’t the greatest, you may need to improve your credit score before you seriously start house hunting. Below you can see the average credit score most mortgage lenders require.
Know how your debt compares to your income
Would-be buyers should start by figuring out their debt-to-income (DTI) ratio. A DTI compares how much you owe each month with how much you earn each month. All debt expenses, such as a student loan debt, alimony, or rent, are counted toward the total.
Generally, expenses like utilities or groceries are not included. After adding together all of the relevant expenses, divide the total by your gross pre-tax monthly income. A lower DTI is less risk to lenders, which is why it can seriously affect the quality of loan someone might qualify for.
Know what you can realistically afford
Qualifying for a $400,000 mortgage does not mean you can afford a $400,000 investment in the real estate market. There are numerous expenses associated with being a property owner other than a mortgage payment. Some potential expenses to consider are not as easily calculated as the upfront costs.
While expenses such as property taxes and homeowner’s association fees can be easily planned for, being a homeowner might mean replacing the roof after a winter of severe weather. Without an emergency fund with significant cash reserves, a once beautiful home can quite realistically become unlivable.
For those financially ready to buy a house
If you believe your financial situation can support a monthly mortgage payment and related expenses, begin your journey to homeownership by applying to a mortgage lender.
Getting a preapproval letter
Unless you have the financial freedom and enough extra cash in your savings account to make an all-cash offer for a house, you’ll probably need a home loan. For most people, a home loan means a mortgage, so you will need to apply to a mortgage lender to get an idea of how much money you will qualify for.
A preapproval letter is proof that a mortgage lender should be willing to loan you money to buy a house. Getting preapproved will require a hard credit check, but it doesn’t mean you are guaranteed to get full approval. That being said, it’s often a necessary step nonetheless since you’ll need to give a real estate agent a realistic price range before house hunting. To start searching for your ideal mortgage lender, check out the vendors below.
The up-front costs of buying a house
In addition to your monthly mortgage payments, remember to keep other costs that come with home buying. This includes your initial deposit, the down payment, closing costs, taxes, insurance, and escrow fees.
Your real estate agent will probably be the person most qualified to help you understand which ones will apply to your home buying situation.
- Once you have equity in your property, you may be able to take out a line of credit with a potentially more attractive interest rate by using the equity in your property as collateral.
- As a homeowner, you can deduct a portion of your monthly mortgage payment on your taxes.
- The main hurdle to buying a house is the overall cost. However, personal issues such as work or family obligations might mean it’s not the right time.
- If you are at a stage in life where you want to begin house hunting, getting pre-approved will give you an idea of how much house you can afford.
View Article Sources
- Publication 530 (2021), Tax Information for Homeowners — IRS
- Mortgage Lending — Federal Deposit Insurance Corporation
- How to Save Money on Mortgage Loan Closing Costs — SuperMoney
- Can You Use A Personal Loan To Buy A House? — SuperMoney
- How To Buy Foreclosed Homes With No Money — SuperMoney
- How to Buy a House at Auction: Step-by-Step Guide — SuperMoney
- 2021 Mortgage Industry Study — SuperMoney
- How to Sell and Buy a House at the Same Time — SuperMoney
- How to Buy a House — SuperMoney