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Buy or rent?
THE MOTLEY FOOL
Ask the Fool
Published: April 16, 2024
Q. Is it crazy to buy a home if there's a good chance I'll move in a few years? -- F.P., Lafayette, Colorado
A. Think twice about doing so. For one thing, you can't be sure that the home will increase in value in a short period, and you don't want to have to sell for a loss, perhaps owing more than the home is worth. Remember to factor closing costs into your calculations. They typically average 2% of the home's value -- and could range from $2,000 to $8,000 or more. Then there are real estate agent commissions, often 5% or 6% of the home's value, generally paid by the seller.
Given all that, you'll clearly pay a lot to buy and then sell your home. What's more, your monthly mortgage payments in the loan's early years will mostly be interest, not paying down the principal owed, so you won't be building equity. And while you own the home, you'll incur costs for insurance, property taxes and maintenance and repairs.
Consider just renting a home instead. If your rent is less than your costs as a homeowner would be, you'll be able to save and invest the difference and build a little nest egg for retirement or for a future down payment on a home.
A rent-or-buy calculator such as the one at Calculator.net/rent-vs-buy-calculator.html can help you decide.
Q. Did Social Security benefits increase in 2024? -- S.S., Eagle, Idaho
A. They sure did. Most years feature a Social Security cost-of-living adjustment (COLA), and for 2024, the increase is 3.2%. Inflation has been significant in recent years, resulting in an 8.7% COLA last year and a 5.9% adjustment the year before.
Fool's School
15-Year Mortgages
With interest rates recently higher than they've been over most of the past 15 years, it's not an appealing time to think about mortgages. But some expect interest rates to fall over the coming years, and many would-be homebuyers simply want or need to buy, regardless. If you're in the market for a mortgage, do yourself a favor and at least consider getting a 15-year one instead of the traditional 30-year loan.
Why a 15-year mortgage? The main reason is that you'll pay much less in interest over the life of the loan. Shorter loans also typically charge lower interest rates. For example, Wells Fargo recently listed an average annual percentage rate (APR) of about 6.6% for 30-year fixed-rate loans, but 6.0% for 15-year fixed-rate loans.
Here are the savings you might reap from a shorter-term loan, via a simplified example: Imagine that you're buying a $400,000 home with a $320,000 loan. A 30-year fixed-rate loan would charge you monthly mortgage payments of $2,049 and a total of around $417,640 in interest paid. A 15-year fixed-rate loan would require monthly payments of about $2,700, with a total interest cost of about $166,060. Thus, while you'll pay more each month, you'll save more than $250,000 in interest, and you'll be done with mortgage payments in half the time -- perhaps enabling you to enter retirement mortgage-free!
A shorter-term loan will also allow you to build equity in your home faster, and if you end up needing to sell the home, you'll be less likely to owe more than the home is worth.
All of that is wonderful, but don't take on a 15-year mortgage unless you're confident that you'll be able to pay the higher monthly payment. Buying a less-costly home can help with that. You might alternatively strike an effective compromise by getting a 30-year mortgage and then making several extra payments per year. Doing so can shave many years off the life of your loan, saving you a lot in interest payments.
My Dumbest Investment
Smartest and Dumbest
My smartest investment was also my dumbest. In 1992, I read an article about a young, fast-growing company. I researched it at the library and liked what I saw, so I bought some shares of Cisco Systems for about $3,500. A year later, I sold two-thirds of my shares for a profit of $1,150. For the next few years, I bought and sold Cisco, selling when it became too large a percentage of my portfolio -- and only when I could offset the capital gains with capital losses -- and buying more on dips when the stock seemed undervalued.
Over the years, I made a gain of $31,700 -- but if I'd held on to all my original shares, they would have been worth about $300,000 only eight years later. -- H.W., online
The Fool responds: Your story is rich with lessons. It does show how powerful it can be to just hang on to your winners, to let them grow and grow over long periods. But if any single stock comes to represent a large portion of your portfolio, it's worth considering selling some shares. Otherwise, you'd have an awful lot of eggs in that one basket, which can be risky, should the stock implode. You were smart to offset your gains with losses, shrinking your tax bill.
(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@fool.com.)
Foolish Trivia
Name That Company
I trace my roots back to 1918, when industrialist Andrew Carnegie founded me as a nonprofit life insurance company offering a pension system for United States teachers. In 1952, I debuted the first variable annuity, and in 1990, a socially responsible investing option. I bought Nuveen Investments in 2014. I've grown a lot, and have more than $1 trillion in assets under management. I paid more than $5.6 billion in lifetime (annuity) income to retirees in 2022. I have no public shareholders and return my profits to my members. I've been named one of the world's most ethical companies. Who am I?
Last Week's Trivia Answer
I trace my roots back to 1999, when four fellows began developing sales automation technology in a San Francisco apartment. By 2001, I had more than 3,000 customers, and by 2012, more than 100,000. I was added to the Fortune 500 in 2015, and in 2020, I became one of the 30 companies in the Dow Jones Industrial Average. I bought Slack in 2021. Today, with a market value recently near $280 billion, I'm one of the world's largest customer relationship management specialists, and I employ more than 70,000 people. Offering cloud-based services, I rake in about $34 billion annually. Who am I? (Answer: Salesforce)
The Motley Fool Take
A Humongous Dividend
Shares of British American Tobacco (NYSE: BTI), owner of cigarette brands Camel and Newport, were recently down about 35% from a high two years ago. That has helped push up the company's dividend yield to 9.8%.
The stock is down in part due to a faster-than-expected decline in sales. Demand for cigarettes is falling, with the number sold in 2023 down 5.3% to 555 billion. It's been building a "noncombustible" side to its business, though, selling electronic cigarettes, oral nicotine pouches and heat-not-burn devices. (Its noncombustible brands include Grizzly, Vuse, Glo and Velo.) These products are generating over 30% of its revenue in 23 markets, and management is targeting a 50% revenue contribution companywide by 2035.
Most investors own this stock for its dividend -- and the company's forecasts for revenue and earnings growth are reassuring. The stock's recent forward-looking price-to-earnings (P/E) ratio of 6.7 is also appealing, below its five-year average of 8.2.
While cigarette sales are declining, British American Tobacco is developing other revenue streams. Tobacco stocks are not for everyone, but if you're not opposed, give this company a look. (The Motley Fool has recommended British American Tobacco stock and options.)
COPYRIGHT 2024 THE MOTLEY FOOL, DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION, 1130 Walnut, Kansas City, MO 64106; 816-581-7500.