The Positives and Negatives of Home Ownership

Homeownership is often called "achieving the American Dream." For some people, it may be a dream that needs to be deferred. This article will give you a clear-eyed view of the pros and cons of home ownership, allowing you to decide if it is right for you now, in the future, or maybe not at all.

Should You Buy A Home?

Buying a home is the largest and most important purchase in most people's lives. However, the economic mobility of today's job market has millions of workers moving every few years, making it difficult to take on the financial difficulties of home ownership.

When deciding whether to buy a home, your financial readiness is only one piece of the puzzle. You must also determine whether your current situation and life goals are compatible with home ownership.

Ask yourself these questions before you begin house hunting:

• Do you have a steady income?
• Do you have a good credit rating and a low level of debt?
• Do you have enough savings to pay a down payment?
• Are you planning to stay in one place for an extended time?
• Can you afford a house that fits your long-term plans, such as having children?
• Can you afford to pay for major repairs (or be willing to do them yourself)?

If you can answer these questions affirmatively, your next step should be to meet with a mortgage lender to get pre-approved for a certain dollar amount. Bids from pre-approved buyers are more attractive to home sellers than bids from someone who has not been pre-approved for a mortgage.

Positives of Home Ownership

There are many reasons to own a home. Here are just a few:

Building Wealth

One of the most significant advantages of home ownership is the financial security it provides. Every mortgage payment you make builds equity, contributing to your personal wealth. A Federal Reserve study revealed that the average homeowner's net worth is 40 times greater than that of a renter, largely due to the equity in their home.

This growing asset can be tapped for major purchases or emergencies through a home equity loan or a cash-out refinance. Financial stability and potential for growth provide a sense of security and confidence in your decision to own a home.

Homes have appreciated strongly over the last several years. This has also built home equity for existing homeowners. The more your home increases in value over the price you paid for it, the more "free" equity you accumulate.

Stability and Security

A home also offers a physical and emotional sanctuary, fostering a sense of well-being and safety. Part of this is the long-term security of a steady housing cost. If you have a fixed-rate mortgage, you know that your housing costs will stay the same for the next 30 years. Even with an adjustable-rate loan, your mortgage payment will remain unchanged for several years. Even afterward, the amount that your payments can change in a single year is capped.

When you rent, your rental payment can (and most likely will) increase yearly unless you trade down to a smaller or less desirable apartment. A popular expression comparing owning vs renting goes, "When you own a home, you're building your equity. When you rent, you're building the landlord's equity."

Control Over Living Environment

A large part of the feelings of safety and security provided by home ownership comes from your control over your living environment. Owning your own home means you don't have to cope with the loud neighbors and disturbances endemic to apartment living. Owning a home also means you can customize and renovate it to suit your tastes and needs. Outdated kitchen cabinets or old carpets? New ones will make you feel better and enhance your home's desirability if you sell. Decide that the living room would look better in yellow? It’s your call.

Tax Benefits

Homeownership provides tax benefits if you itemize your income tax returns. The interest portion of your mortgage payments is tax deductible, as are any "points" you had to pay at mortgage origination to lower the interest rate. If you put less than 20% down on your home purchase, you must take PMI—Private Mortgage Insurance—which is also tax-deductible.

You can deduct a portion of your mortgage payments if you have room set aside as a home office. Property taxes are deductible, and if this is your primary residence, most states have a homeowner exemption that brings down the amount of your home that is assessed to determine your property taxes.

Finally, when (if) the time comes to sell, you won't have to pay taxes on the first $250,000 of profit you earn ($500,000 for couples filing jointly) thanks to the capital gains exclusion for primary residences. This means that if you sell your primary residence for a profit, you can exclude up to $250,000 of that profit from your taxes, or up to $500,000 if you're married and filing jointly.

Investment Potential

Home ownership also opens up avenues for investment. If you ever need to move, you can turn your home into a revenue stream by renting it out. The rental income could potentially cover your mortgage payments, turning your home into a profitable asset. If your home is located in a popular tourist area, vacation rentals or using platforms like Airbnb could be even more lucrative. This investment potential can make home ownership a forward-thinking and optimistic choice.

Negatives of Home Ownership

We've covered some of the upsides of home ownership. Now, it's time to review the negatives.

High Upfront Costs

First-time homeowners are often shocked by how much money is required to close on a house in addition to their down payment. Typical fees due from the buyer at (or before) closing include:

• Home Inspection (skip this at your peril!)
• Home Appraisal
• Loan Origination Fee
• Discount Points/Prepaid Interest
• paid at closing to buy down the interest rate on the mortgage
• Escrow Fee
• HOA Transfer Fee
• Pre-payment of Property Taxes and Homeowners Insurance
• Processing/Underwriter Fee
• Real Estate Attorney Fee
• Recording Fee
• Title Search/Title Insurance Fee

Property Taxes and Homeowners Insurance

Property taxes, and especially homeowners insurance, have become major expenses for homeowners. In states prone to natural disasters, such as Florida and California, skyrocketing homeowner insurance prices force homeowners who can't afford the higher premiums to sell their homes.

Many states ease the burden of property taxes for homeowners by offering homestead tax exemptions for primary residences. This can be a percentage of the assessed value of your home or a fixed amount. In Florida, for instance, homeowners can reduce the assessed value of a primary residence by up to $50,000. The bad news for homebuyers is that the appraised value of a home for property taxes is reset to present-day levels when a home is sold. Take this into consideration before making an offer on a home instead of looking at the property taxes the seller is paying.

Market Risk

While housing shortages and record sale prices make it hard to believe now, home prices can also fall when the local real estate market falters. Local economic disruptions, such as a large employer closing, can cause an upheaval in the local real estate market. Selling your home will be challenging if many people move out of the area.

Maintenance and Repairs

Homeowners should earmark some savings for home repairs. People who live in condos or apartments often don't realize how expensive home repairs or replacing major appliances can be. Experts recommend putting aside 1% of your home's value to cover unexpected events. For example, a home's roof that is rated for 30 years might last as little as 15 to 20 years, depending on the climate of your location.

Recurring maintenance costs can include servicing the air conditioning, lawn care and landscaping, swimming pool maintenance, and pest control. Add HOA fees to the total if you live in a location maintained by a homeowners association.

Reduced Flexibility

Housing is an illiquid market. A signed purchase contract is just the beginning, even in a seller's market. It can take two months or more to finalize a sale, depending on approval of the buyer's financing and any problems discovered in a home appraisal or inspection. This can present difficulties if the seller needs to relocate to start a new job by a certain date.

Is It The Right Time To Buy A Home?

Buying a home is one of the most significant purchases most people will ever make. It can become a cornerstone of your future and your future wealth as you build equity and a haven, both physical and emotional.

However, it is important to approach buying a home with a clear mind and open eyes. Even if you can afford it, your life goals or employment situation might make temporarily putting off home ownership your best choice.

That said, the calculus of owning real estate changes drastically when looking for investment properties. One way of getting ahead in real estate investing is with the Verified Investing Real Estate Wealth System, which will take you from a novice to a knowledgeable investor, whether your goal is owning residential, commercial, or retail real estate.