Home ownership has always been part of the American Dream. Because of that, many people start their home search without considering the benefits or risks. If you are contemplating buying a home, you should know and review the advantages & challenges of the investment decision you are about to make and all that comes with it before signing on the dotted line.
Good Long-Term Investment
According to the Federal Housing Finance Agency (FHFA) House Price Index (HPI), U.S. home prices rose an average of 34.71% over the previous five-year period. On average, homeowners saw the value of their real estate investment grow by 6.94% per year. That’s not a bad return on an investment that also provides you with a place to live.
- Mortgage interest and property tax payments may be included as itemized deceptions on federal and/or state income taxes. Consult with your tax advisor.
- Mortgage Insurance (MI) premiums may be tax deductible. Consult with your tax advisor.
Capital Gains Exclusion
If you sell the home, the law allows you to keep the profits and pay no capital gains taxes. That’s tax-free profit of up to $250,000 for single homeowners and $500,000 for married couples. This is for your main residence only—not for a second home or vacation property.
The Power of Amortization & Appreciation
Making each monthly payment reduces the loan balance, increasing your equity in the property. Meanwhile, as your property value increase, this provides another powerful long-term wealth accumulation vehicle for your family's financial security. Don't expect the value to increase drastically if you're in it for the short-term. But if you stay in your home long enough, there's a very good likelihood you will be able to sell your home for a profit because of appreciation later in the future.
Forced Savings and/or Potential Inheritance
As you pay down your mortgage and reduce the amount you owe, without realizing it, you are saving as the value of your home is increasing—just like the value of savings account increases with interest. You own something tangible that can be left to your heirs to help establish their financial security if you choose to never sell the home. When/if you sell, you will likely get back every dollar you paid out and more, assuming you stay in your house long enough.
Pride of Ownership
One often-cited benefit of home ownership is the knowledge that you own your little corner of the world. You can customize your house, remodel, paint, and decorate without the need to get permission from a landlord.
Bad Short-term Investment
You can expect to pay anywhere from 2% to 5% of the purchase price in closing costs. For this reason, buying a home is not a very good short-term investment. Experts say you should plan to stay in your house at least five years to recover those costs
Upfront Cash Requirements
Buying a home requires significant upfront cash. Some of the most common closing costs include an application fee, appraisal fee, attorney fees, property taxes, mortgage insurance, home inspection, first-year homeowner’s insurance premium, title search, title insurance, points (prepaid interest), origination fee, recording fees, and survey fee.
Increase In Expenses
You will need to budget for maintenance/upkeep, property taxes, insurance and homeowner association (HOA) fees (if you are moving into a community that requires these).
Your costs are predictable and more stable than renting when they are based on a fixed-rate mortgage. While payments may be more predictable, an increase in total housing cost may also require you to more closely follow a budget and may limit your flexibility on other discretionary spending.
Your property value may fluctuate, so it is important to stay focused on the long-term benefits of home ownership.
Can limit flexibility to relocate for a job or change neighborhoods.
Additional Financial Responsibilities
Ownership comes with responsibilities. You must pay your mortgage or risk losing your home and the equity you’ve built. Maintenance and upkeep are your responsibility. You can’t call the landlord at 2 a.m. to have a leaky water pipe repaired. If the roof is damaged, you must repair it—or have it repaired—yourself. Lawn mowing, snow removal, homeowners insurance, and liability insurance all fall on you.
A home is an investment that comes with many investment benefits but also risks, which makes it an investment that is not for everyone. Thus, weighing the investment benefits against the risks is important. A rational comparison of pros and cons can help you decide whether to put your money into a home investment or potentially find better returns elsewhere. Now that you have analyzed the potential benefits and drawbacks to home ownership, are you ready to make the plunge? If so, start with these 8 Tips for Buying a House.