Wealth Gap Getting Worst Between You and Friends

 The Wealth Gap: How Homebuying Timing Can Impact Your Financial Future

Introduction:

The decision to buy a home is one of the most significant financial choices most people will make in their lifetime. But what happens when two individuals make that decision at different times, under varying economic conditions? In this blog post, we will explore the wealth differences that can emerge over a span of 30 years between someone who purchased a home in 2020 at a 3% interest rate (Homebuyer A) and another who decided to buy a home in 2025 at a 7% interest rate (Homebuyer B). These choices may seem small, but they can have a substantial impact on your long-term financial well-being.

Setting the Stage:

Let's reintroduce our two hypothetical homeowners:

Homebuyer A: Purchased a house for $400,000 in 2020 at a 3% interest rate.

Homebuyer B: Decided to buy a home in 2025 still at $400,000 but at a 7% interest rate.

Initial Investment:

Homebuyer A bought their home for $400,000 with a 3% interest rate, resulting in a monthly mortgage payment of approximately $1,686.

Homebuyer B is priced out of the market due to a 7% interest rate and no major price declines. They can not afford, or qualify for a $2,654 mortgage payment. They are forced to rent instead.

Monthly Payments and Rental Costs:

For Homebuyer B, who decided to rent instead of buying, let's factor in their monthly rental cost:

• Homebuyer A (2020-2050): Mortgage paid off, no monthly housing costs.
• Homebuyer B (2025-2050): Monthly rent of $2,000. (at 3% increases it would be over $4,500k in 30 years)

Monthly Savings and Investment:

Homebuyer A, having no housing costs, decides to invest $1,000 per month into a retirement account due to the savings between renting and mortgage savings.

• Homebuyer A (2025-2050): Invests $1,000 per month into a retirement account.

Total Payments Made After 30 Years:

• Homebuyer A: Total housing cost of $606,000.
• Homebuyer B: Total rental payments of $720,000.

House Value Appreciation:

Let's consider that the value of the houses appreciates annually at a rate of 3% compounded.

• Homebuyer A's home value at the end of 30 years (2050): Approximately $623,250
• Homebuyer B's rental property: No property ownership

Investment Value After 30 Years:

Homebuyer A, who invested $1,000 per month into a retirement account, would have accumulated substantial wealth in their retirement account. Assuming a modest 5% annual return on investment, here's what they would have saved:

• Homebuyer A: Approximately $844,000

The Wealth Gap Widens:

At the end of 30 years:

• Homebuyer A: Owns a home with a value of approximately $623,250, has approximately $844,000 in their retirement account, and no housing costs.
• Homebuyer B: Has no home equity, no retirement savings, and paid a total of $720,000 in rental costs.

Conclusion:

The decision of when to buy a home and at what interest rate can significantly impact your financial future. In our hypothetical scenario, Homebuyer A, who purchased their home in 2020 at a lower interest rate, ended up with a fully paid-off home, substantial home equity, a well-funded retirement account, and no housing costs. Homebuyer B, who decided to buy in 2025 at a higher interest rate but then chose to rent, missed out on building home equity and was unable to accumulate retirement savings.

Furthermore, the appreciation of Homebuyer A's home value over 30 years added another layer of wealth to their financial portfolio. It's essential to consider not only the immediate financial implications of your homebuying decisions but also the long-term consequences and opportunities for wealth accumulation. When making such an important choice, it's wise to consult with financial advisors, consider the prevailing market conditions, and weigh the potential consequences on your wealth accumulation over time. By doing so, you can make a more informed decision that aligns with your long-term financial goals and secures your financial future.