Buying a Home: Are You Ready for Homeownership?
When people hear the words “American dream,” they often think of buying a home. Not answering to a landlord. Or feeling like every rent payment is flushing money away. Until the mortgage crisis a decade ago made it clear that buying a home does not always lead to a happy ending.
So how do you know if now is the right time to buy a home? By understanding the risks and rewards and asking yourself some tough questions about your goals and your resources. This article covers the pros and cons of owning a home and helps you determine if now is the right time to buy one.
Advantages of Homeownership
The decision to buy or rent is about more than warm fuzzy feelings, although those are important. It’s about numbers, too. Depending on where you live and what the economy is doing, renting can be more or less expensive than buying. And when you have to come up with first and last month’s rent plus a big deposit, renting can cost you more upfront than buying with a low down payment mortgage. Or a mortgage with down payment assistance.
Here are some other advantages:
1. You accrue wealth.
Your mortgage is a “forced savings” plan. Paying it down builds home equity, which is an asset that you can sell or borrow against. When your home’s value increases, you earn even more. In fact, the Federal Reserve Bank says the average homeowner’s net worth of $254,900 is about 40 times that of the $6,270 average net worth of renters! Almost 50 percent of the wealth of homeowners is in the form of home equity.
2. You can pay less to Uncle Sam.
Home mortgage interest is usually tax deductible for people who itemize their deductions. So are mortgage insurance and property tax payments. You can even defer most gains when you sell your home. The Congressional Research Service found that the tax benefits of home ownership are worth on average $1,772 per year.
3. You can kiss your landlord goodbye.
If you rent, you may not be able to change the color of the walls or carpets, bring a pet into your family, wash your car in the driveway, or buy your kids a swing set. Some communities don’t allow renters at all – if you want to live there, you have to buy.
4. You can freeze your payment with a fixed rate mortgage.
You can’t do that by renting. While average rent increases per year run 3% to 5%, this can vary wildly by area. Kansas City rents, for example, increased on average by over 33% in 2020!
5. It’s good for your kids.
Children of homeowners are 59% more likely to become homeowners, according to Habitat for Humanity. They are also 25% more likely to graduate from high school, 116% more likely to graduate from college, and exhibit fewer behavioral problems.
There are many good reasons to buy a home. But that doesn’t make it right for everyone, or at least not right for everyone all the time.
Disadvantages of Buying a Home
Not everyone can buy a home. And even if you can, it doesn’t necessarily mean you should. Here are the biggest disadvantages of homeownership.
1. Houses are not liquid investments.
We know; shows like Flip this House make dealing in property look easy and profitable. But in real life, buying and selling real estate involves lots of time and the costs are high — mortgage lender fees, real estate commissions, title and escrow services, and more. Closing costs for buyers come to, on average, 3.5 percent of the price of the home, according to the Federal Reserve Bank. Selling a home costs even more — seven to ten percent of the sales price! This means that real estate is probably not a good investment unless you plan to keep it for several years.
2. You’re stuck.
Renting means having the freedom to get up and go — for a new job, for the man or woman of your dreams, to bicycle around the world – that owning just doesn’t offer. If you rent and your newest neighbor decides to relive his youth with loud parties and racing pipes on his Harley, you can leave if it bothers you. If you own, ear plugs may be in your future.
3. When things go wrong, it’s your problem.
When good appliances go bad, you get to stay home waiting for the plumber and write a painful check. If you buy a home with a beautiful yard, realize it won’t stay beautiful for long unless you devote your weekends to it or pay someone else to.
4. Your home’s value could decrease in the short term.
As many found during the 2008 recession, home prices don’t always increase. Your down payment could disappear if your home’s value erodes. You could find yourself owing more on the property than it’s worth.
The decision to buy a home means weighing the pros and cons. And applying them to your circumstances.
QUIZ: Are You Ready to Buy a Home?
These questions can help you see if homeownership is right for you.
1. Do you plan to remain in your location for at least five years?
Buying a home is generally not a great idea for rolling stones because real estate transactions involve expensive commissions, lender fees, and title charges. That can reverse a lot of wealth-building if you move frequently. However, homeownership might still be right for you if you plan to convert your residence to rental property when you leave.
2. Have you saved a down payment, closing costs, and an emergency fund?
A big savings account is not always required because first-timers often qualify for down payment assistance (DPA) and closing cost help. But if you have not been able to put money aside while renting, how will you handle the additional costs of homeownership like repairs and maintenance? What if you experience an interruption in income or other financial emergency? And if your monthly payment will increase, where will that extra money come from?
3. How handy are you around the house?
You don’t have to be a regular at Home Depot, but it helps. If not, you’ll be paying someone else to maintain your yard, make minor repairs and take care of upkeep like painting and window washing. For major repairs, you’ll need to budget for them or purchase a home warranty.
4. Will you be okay with less disposable income?
Assuming that your monthly mortgage payment, property taxes, homeowners insurance, HOA dues (if applicable), and maintenance/repair budget exceeds your current rent, you’ll have less “fun money” after buying a home. To find out if you can handle it, “practice” for homeownership by subtracting your current rent from what you expect to spend on a home each month. Put the difference every month into savings and get used to living on less. Bonus: you’ll have extra money for your down payment and closing costs if you decide to buy.
5. How solid is your marriage, your job and your medical coverage?
Put off your home purchase if you lack job security, health insurance, or marital stability. According to the University of Illinois, the top causes of foreclosure in the US are medical bills, divorce and job loss.
The decision to buy (or not buy) a home is highly individual. Don’t do it because you think it’s a way to quick riches, because all your friends are buying, or because you’re worried about being priced out. What if you’re not sure how you feel? Try this exercise: Think about all the pros and cons described above, and the answers to those five questions. Next, close your eyes and imagine that the decision has been taken away from you — that you are prevented from buying a home. And check your gut — do you feel disappointed? Or relieved?
There’s your answer.