Most people think that buying and owning your own home is a universally positive financial move. And truthfully, home ownership can be financially advantageous for millions of people. But to say that it’s a universally good idea, or that it’s always financially beneficial is an overstatement.
The reality is home ownership doesn’t always work out in your favor.
Why is this the case and what should you learn from it?
Secondary Home Expenses
First, understand that there are many secondary home expenses for which you’ll be responsible. If you calculate the principal and interest you’ll owe on a mortgage each month, you might be surprised to find that the amount is significantly less than what you would pay in rent for a similar home in the area.
But this doesn’t take into account the other expenses you’ll be paying, such as:
- PMI. Private mortgage insurance (PMI) is an additional payment you’ll need to make with some lenders if you don’t provide a sufficient down payment.
- Insurance. Most lenders require you to have a home insurance policy in place; even if you’re not required to have insurance, it’s wise to have a policy.
- Property taxes. You must pay property taxes to retain ownership of your home. This typically amounts to thousands of dollars every year.
- Maintenance/upkeep. As a homeowner, you’re responsible for ongoing maintenance and upkeep, ensuring that your home remains in good condition. Simple actions, like changing your air filter or cleaning the gutters, may not be expensive or time consuming, but in aggregate, they can add up to a lot.
- Repairs. Experts recommend setting aside at least one percent of your home’s value for repairs each year. Some years, you may not have any major repairs. Some years, you may have thousands of dollars of repairs to handle. If you have an older home or a home in poor condition, these costs can be prohibitive.
Once you incorporate these expenses, the math changes. You’ll quickly realize that homeownership is at least as expensive as rent in most cases – and sometimes, these extra costs accumulate so fast that they put you in a financially precarious situation.
For example, if you’re faced with an emergency repair, you may not be able to afford your monthly mortgage payment, meaning you’ll be threatened with foreclosure.
Risk of Losses
Historically, real estate prices have risen. If your home appreciates in value over the years, you’ll likely be able to sell it for a profit, making up for most of the expenses you incurred along the way and granting you a reasonable return.
But this is far from a guarantee. Countless variables could interfere with your ability to profit on the eventual sale of your home – and if you never sell your home, the value appreciation won’t be relevant to you anyway.
If you overpay for your home, or if the real estate market experiences a significant downturn, you could end up underwater on your mortgage. That means you’ll owe more money on your house than it’s worth. For example, let’s say you bought your house for $350,000 and borrowed $300,000 to do it. After a couple of years, you’ll still owe most of that $300,000, but if the housing market tanks and the value of your home sinks to $250,000, you’ll end up being $50,000 in debt if you choose to sell the house.
Fortunately, housing market crashes tend to even out eventually, and most houses do appreciate in value given a long enough timeframe. But every home comes with a risk of loss to the owner.
Buying vs. Renting
Renting and buying are two ways to secure the housing you need, and each has advantages and disadvantages. Buying a house gives you more autonomy and control, while allowing you to build equity and take advantage of property appreciation.
But there are also some advantages of renting to consider, such as:
- In some cases, renting is cheaper. In many areas, it’s cheaper to own a house than rent one – but this isn’t always the case. Some areas feature very attractive rent prices, even while housing prices climb to absurd levels. When you factor in secondary costs of home ownership, rent prices look even better.
- Renting comes with fewer responsibilities. As a renter, you’re not the one responsible for home repairs or maintenance (generally). If an appliance totally breaks down or if the roof starts leaking, all you have to do is call your landlord and have them take care of it.
- Renting is much more predictable. Your landlord might try to raise your rent periodically, but for the most part, renting is more predictable and consistent than owning a home. If you’re a strict budgeter, this can be massively beneficial for you.
- Renting gives you more flexibility. As a renter, you have more flexibility and mobility; you’re not tied to a location because of a financial investment.
Alternative Investment Power
You also need to consider the potential power of non-home investments. Investing in dividend stocks, index funds, bonds, or REITs could give you a much bigger and more consistent return than investing in a primary house. Even in the real estate world, it’s sometimes more financially advantageous to purchase and manage a rental property than to buy a house for your own living.
Instead of saving up a down payment for a home or having most of your net worth tied up in home equity, it might be better to use your extra money to invest in more powerful or more reliable assets.
Selling Your Home
So, what should you do if you currently own a home and you’re not convinced it’s worth keeping?
Real estate decisions are complex and require due diligence; you can take your first step toward a better financial future by getting a cash offer on your home. There’s no obligation, and it only takes a few minutes to generate your offer, so there’s no reason not to see what your house could be worth. Get your free cash offer today!