The Pros & Cons of Homeownership
Are you certain that you want to be a “homeowner”? Are you aware of the responsibilities that come along with homeownership?
Here are some Advantages of Homeownership:
- Homeownership Builds Wealth over Time
- Every month when you make a mortgage payment, a portion of it goes toward paying down the loan thereby increasing your equity (as opposed to renting where it fully benefits the owner of the property instead of you).
- Over the long term, housing has an undeniable record of solid appreciation.
- In the Past 15 years, the net worth of the typical homeowner has ranged between 31 and 46 times that of the net worth of the typical renter.
- Housing is a hedge against inflation.
- If you own a home, it will go up with, or at least influenced by, the rate of inflation.
- Real Estate is one of the only investment vehicles in which you can leverage your money for gains. Think about it- you are partnering with a lender and the lender is typically investing the majority of the money needed to purchase your future home. You may be coming up with a down payment of 3, 5,10, 20 or 25% and the lender comes up with the rest.
- Housing appreciation of 5% creates a greater return on your actual money invested than stocks going up 5%. This is because housing appreciation is on the value of the house, not on the down payment of the house.
For example, if you invest $40,000 as a down payment on a $400,000 house and its market value appreciates 5%, you would gain $20,000 in equity. If you invest the same $40,000 in stocks and they go up in value by 5%, you would gain $2,000 in value.
- Stable monthly mortgage payment.
- Having a consistent monthly mortgage payment is unlike renting, where a landlord can choose to raise rent on you when it comes time to renew your lease, or worse, tell you to move out at the end of the lease.
- Pride of Ownership.
- There are psychological benefits to owning your own home.
- Home-owners can personalize their home to their hearts content (there may be some restrictions of course if you are within an HOA community).
- Tax benefits. Some mortgage-related expenses are tax deductible (talk to your tax advisor for more details and qualifications)
- Write off the cost of the interest that you pay on the loan each year
- Write off the cost of the PMI (PMI is the mortgage insurance that you’ll likely need to pay if your down-payment is less than 20%) that you pay each year, if applicable.
- Avoid paying capital gains taxes when you sell (currently this applies if you’ve lived in the home for 2 of the past 5 years prior to the sale).
- Deduct points paid at closing
- Deduct property taxes
- Deduct moving expenses if you move because of a new job or job transfer
- Home offices can be another source of tax deductions
- The potential for positive cash-flow.
- Over time, you may decide to move. You may be interested in renting your home rather than selling it. If your mortgage payment is $1800 and you can rent your home out for $2,600, you may want to rent it out and keep that extra money in your pocket every month and also get the added benefit of long term appreciation. This option is certainly not for everyone but is an option nonetheless.
- The opportunity for pulling cash out of the equity you have in the home.
- In the long term, you will likely have quite a bit of equity in your home. It may be possible to do what we call a “cash out refinance” or HELOC (Home Equity Line Of Credit). This would essentially free up a sum of cash by borrowing more money from the equity in your home. Often times, this would result in a higher monthly mortgage payment in exchange for getting a lump of cash. An added benefit is that this cash would be tax-free.
Here are some Disadvantages of Homeownership:
- You Could Lose Money.
- If you only plan to live in a house a few years before selling, you could lose money. Unless you either buy a house at a discount (compared to other recent sales in the area) OR the housing market is going through a strong appreciation cycle, you may want to consider renting instead.
- Potential to cost more monthly.
-Your monthly mortgage payment together with the cost of utilities may be more than what you would spend when renting.
- Repairs and Maintenance
- Homeownership is a long term commitment. It is your responsibility to keep up with maintenance and repairs on a house over the course of time. This could mean things such as painting the exterior, trimming trees, replacement of the roof, furnace, water heater, garbage disposal, etc. If you buy a condo or townhome, the exterior responsibilities may be reduced or eliminated as a result of an HOA fee that you and other owners of the neighborhood pay which theoretically creates a pool of money that goes toward the exterior repairs and maintenance. If the pool of money isn’t large enough to cover the exterior expenses (such as replacement of roofing, siding, painting, etc.), the HOA will have the ability to charge you a special assessment to increase the pool of money so that the critical expenses can be paid. The special assessment could be a few hundred dollars or tens of thousands of dollars and the HOA may tell you that you have one year (or less) to pay it. Therefore, it’s critical to assess the financial stability of the HOA in relation to the deferred maintenance of the complex when buying a condo or townhome.
- Decreased mobility
- You may not be ready to settle down in one place.
If you are a first time home buyer and want to understand the entire process of buying a home before writing an offer, we can certainly help. We are very much into details and are happy to share our knowledge and experience with you so that you can make informed decisions throughout one of the most important purchases of your life. For a free, no obligation consultation, please contact us.