Risks vs. Rewards of Homeownership
So You Want To Buy a Home
Taking the step from renting to homeownership is a life-altering event. Many people consider it the litmus test for adulthood. It is both thrilling and scary at the same time. It should be because not only is owning a home in itself a significant responsibility but it is the most significant purchase the majority of people will make in their lifetime. Owning a home is also a source of pride, of achievement, and for millions, still an essential component of the American Dream.
If owning a home is on your bucket list, perhaps you are waiting for the right time. The question is, how will you know when that is? There is no stock answer. There are many factors to consider, both pro and con on the subject of buying a home. For many first time home buyers, money is an obstacle. But that isn’t always the case. Nor should the considerations of when to purchase a house be strictly limited to the financial ability to do so.
There are outstanding advantages that come along with owning a home and there are detriments as well. Let’s take a look at how the pros and the cons balance each other. When we evaluate both and can get to the intersection where rewards offset risks, we will have a clearer picture of how we can proceed.
Rewards vs. Risks of Buying a Home
Reward: When you walk away from the closing table with the keys to your new home, you get to make the decisions. The world is open to all the ways you can think of to customize your living space to suit your taste and needs. No more landlord is setting the rules of engagement. Grab the paint brush and if it suits your fancy, cover the walls of your bedroom with Benjamin Moore Midnight Dream. Sweet freedom!
Risk: With freedom comes responsibility. Now that you have become your landlord you will pay the taxes, utilities, water bills, sanitation, insurance fees linked to owning a home. It will also be incumbent upon you, the owner to take care of maintenance and any improvements that may become necessary. Be sure you are prepared to handle these costs.
Reward: You can deduct some of the costs of ownership such as property taxes and interest on your Federal Income Taxes thereby shrinking your tax burden and making the price of homeownership lower. You can save more money by installing solar panels at a tax savings credit of thirty percent.
Risk: Tax laws change. The Tax Cut and Jobs Act just passed by Congress limits the interest deduction to $750,000 of debt. It also restricts the amount you can deduct for a combination of property taxes individual income, sales and property taxes to $10,000. The Solar Power tax incentive is still in place.
Reward: Homes are a safe investment. When you pay rent month after month, you end up with no residual value at the end of your lease. When you own a home, you build equity as you pay down the principal on the mortgage while the value of your property rises.
Risk: The housing market can have a downturn. Many of us lived through the recession that began in 2007 and 2008 when the housing bubble finally popped sending home values tumbling. One of the factors that were a significant cause was subprime mortgage lending. Today we have safeguards in the way of government oversight and lending regulations. Lenders are also far more conservative and cautious about approving mortgage applicants. Although many point out that home values are rising too quickly, that is not the case for higher-end properties nor in all geographic locations. Currently, the limited inventory of homes for sale at the lower price points is fueling, the higher home prices. However, you would be prudent to keep in mind there is always a risk factor inherent in any investment.
Reward: Although taxes and insurance may go up incrementally based on the rising value of your home, with a fixed rate mortgage, your payment remains constant throughout ownership. When you are a renter, in the current market you know for sure that each time your lease is up for renewal, you will be paying more rent. Usually, the increases are limited to two or three percentage points, but there are many examples in the market where rents have risen as high as ten or twenty percent. Affordable rental homes and apartments are becoming scarce.
Risk: Costly home repairs or city assessments can pop up without warning, and as a homeowner, you will have to pay for them.
Personal Questions To Consider When You Want to Buy a Home
We have explored the financial risks and rewards of homeownership. Our story wouldn’t be complete without looking at the few other factors in determining if this is the right time to buy a home for you. Consider how long you plan on living in the area. If you want to plant roots and not considering a move for at least a few years then buying might be right for you.
Owning a home means having a lawn to mow, leaves to rake, shrubs to trim and regular home maintenance chores all year long. If doing this kind of work suits you great. If not, ask yourself if you can afford to have all the maintenance chores you don’t like done for you while you enjoy more time for leisure activities.
Do you frequently travel for business leaving your home empty? Perhaps a condo or a townhome in a managed community might be a better option than a single family home. You also wouldn’t have to be concerned with yard chores either.
There are emotional and psychological aspects that are difficult to measure regarding the personal benefit to home ownership as well. For me, when my wife and I bought our first home, we had a sense of belonging and a responsibility to make our community a better place. It gave us a feeling of permanence, safety, and security. Ultimately it is up to each to decide whether home ownership is the right choice.