Home ownership is part of the American Dream and many personal finance pundits insist you need to become a homeowner in order to be financially successful and create wealth. While it’s true that owning a home can be a significant key to building long-term wealth and financial stability, that isn’t always the case. There are many instances where buying a home can actually do more harm than good and could actually put you in an even worse financial situation.
Why do people buy homes? Obviously, there is something to be said about owning the place you live versus just paying rent in return for living there. Beyond that there’s a common belief that over time your home will increase in value which in turn creates wealth. This is the same belief most of us hold regarding the stock market. But as we’ve seen in recent years there are also times when this doesn’t hold true. Just like anything there are good reasons and bad reasons to buy a home.
Why Should You Buy a Home?
There are many good reasons to buy a home:
- Mortgage interest and generally property taxes are tax-deductible.
- The possibility of not paying taxes on the gains when selling a home (up to certain limits).
- Increases your net worth by building equity.
- Possible appreciation in value of the home.
- Freedom to build, design, and fully control the look and feel of your dwelling.
- Interest rates are historically low. Compare mortgage rates.
These are all nice benefits when owning your own home. You can save money on taxes, your mortgage payments build equity (although often slowly) which can in turn be sold for a profit in the future, and you have almost complete freedom in regards to how you want your home, yard or garden to look inside and out. Of course there is a downside to everything, including home ownership.
Why Shouldn’t You Buy a Home?
Even good things have bad counterparts:
- The tax benefits may not be as substantial as you thought.
- Real estate values do not always go up, or increase fast enough to guarantee a profit when you sell.
- If you are young or uncertain where the future will take you, owning a home doesn’t provide the flexibility to move on short notice.
- No more landlord. You are the landlord and when something breaks, you need to fix it yourself or pay to have someone fix it.
- General maintenance can eat up a lot of time and money.
Finding the Balance Between the Pros and Cons
Buying a home is a very big decision. Everyone has a unique situation and just because conventional wisdom leads you to believe you must own a home sooner than later doesn’t mean it is right for you. Take a look at your situation to see if the benefits will outweigh the negative issues.
Ask yourself these questions: Will the tax benefit really have that much of an impact over your standard deduction? Are you certain you will be working in the general area for years to come and won’t have to move? Do you have the time and money to put into maintaining the home? If any of these answers are uncertain you need to really consider whether or not buying right now is the right decision for you.
Some People Say You Can’t Go Wrong Buying a Home
Wrong. You can do great harm to your financial future if you buy a home for the wrong reasons. This is especially true for people who either like to move frequently or have an job situation that may lead to a move within a few years. If something arises that requires you to move from your newly purchased home within the first few years you are looking at the possibility of losing a substantial amount of money, especially in this real estate market.
First, the real estate market is a bit unpredictable which can be seen in real situations recently. If you need to sell a few years after you buy do you think the value has increased enough to be profitable? Even if the value has increased greater than inflation will that amount be enough to cover the thousands of dollars in fees and closing costs associated with selling the home? Also, don’t forget that in some areas a home may take many months if not a year or more to finally sell for the price you’re looking for. If you are pressed for time you may have to substantially reduce the price to get rid of it in a timely fashion.
Second, homeownership simply isn’t for everyone. If you enjoy city life it can be virtually impossible to find affordable housing in or around the city. It some situations may be far more beneficial to rent. For others, they are simply too busy to tend to the issues that come from owning a home. If you have a lawn, it needs to be mowed. If you live in an area that gets snow in the winter your driveway and walkways will need to be cleared. If your water heater breaks you will need to go buy another one and have it installed. Young professionals can find themselves too busy to tend to these issues, and while they require time, more importantly they require additional funds that you don’t have to worry about when you don’t own a home. These types of things alone can account for hundreds or even thousands of dollars a year.
As you can see, just because the talking heads on TV and in most finance books tell you that owning a home is a path to wealth doesn’t mean you should jump into a new home. Don’t feel like you need to rush into buying a home just because all of your friends are or that you feel you need to in order to start building equity instead of throwing away money on rent. Clearly there are benefits to owning a home, but if you make the decision too soon or for the wrong reasons you can find yourself actually doing more harm than good. Stick to the basics and analyze your situation carefully.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
The author is right by telling consumers "Do not buy a home for the wrong reasons!" The truth is paying mortgage on a long-term basis--(i.e. incurring debts for at least two or three more decades) indeed is a big liability and incurred huge financial risks when none of us know for sure what could happened to us in the next two to five years let alone having to bear the financial burden to pay a huge monthly mortgage and possible huge repair costs!
It is one thing if you could pay more than 50% as down payment and incurred a shorter time-frame to completely paid off your mortgage, but it is another story when you have to sacrifice almost all of your life-savings just to make the down payment in the house and still have to be financially liable for the mortgage for the next two or three decades assuming nothing goes wrong in your job and nothing goes wrong in your health or worst of all, being physically injured and impaired as a result of third-party liability incidents!
So, buying a house is never a simple decision; and it should not be a quick and impulsive decision. Therefore, buying a house has to be the right decision and right reason for you for your true and desirable benefits, not the proclaimed benefits on homeownership by the media or by majority of the unreliable sources! Do as much research as possible and evaluate your own needs and desires! Question the validity and authenticity of the typical comments (i.e. exaggeration on the benefits) made about owning a home and learn as much as about the pros and cons in homeownership!
don't be the bank's sucker. paid for the home all in cash. the bank is the reason so many home owners are now living worst then before they own their homes. once you are in foreclosure, you will loose the liberty to borrow anything from any bank for 7 long years. also, if you are in foreclosure, the bank sell the house, they get all the money. but you get nothing. think about it.
You have some smart readers and this is a very timely article. I like the comment "you are not a homeowner until you actually OWN the home". Very astute point and one that cannot be ignored.
I bought (got a large loan) my home over a year ago. It is nice having a place to "settle", but in this short period of time I must say homeownership is overrated. I still believe, though, that building equity in a home is better than not, all else being equal. IMO,the true path to wealth is owning OTHER people's homes, not your own.
This is a timely article for me. I am getting close to putting a downpayment on my first non-rental apartment. I feel somewhat pressured by society to do this, but at the same time I can see a lot of benefits of owning. Still I will take the time to make this decision quite carefully
I own a house for many reasons. But my major motivator is making my house into a home for my family. I love seeing my kids and us parents enjoy our familiar surroundings. I need to live somewhere. So, why not buy a house? We did not stretch ourselves financially when we bought the house and we are all very happy that we have such a nice place to live in.
Good points. More and more I'm reconsidering my old ideas about owning a home. I'm still a renter, and do like the flexibility of being able to move. But if I had had the cash, I would have bought a house by now. Might be a good thing, this is forcing me to reconsider and fully weigh the decision.
This is a tough one. I would love to own a home, but I'm in my 20s and not sure where I will end up (work and whatnot).
When I do buy a home, I plan on doing it for clear financial reasons: I found a house that is arguably undervalued, that is not an emotional buying, that is in an area that is "more than likely" to increase in value, etc.
We have bounced around the idea of buying a house for some time. We are debt free, and currently live in a house provided as part of my compensation. Effectively, we are "renters". On the pro-side, it would be cool to have our own place. On the neg-side, I really hate the idea of paying interest and dealing with some of the hassles of home ownership. Lots to think about...
My boyfriend and I are 30, and we never plan to own a home until we retire because that's the soonest we feel that two things are true: we'll be in the same place for awhile, and can buy the home outright. As soon as we pay off our consumer debt, we are NEVER financing anything again.
If you are still paying a mortgage, it is still "rent" - just rent to the bank. Equity is a myth unless you plan on (and are able to - good luck in this economy) sell the home for the asking price within the time frame you specify AND either buy a significantly smaller home or go back to renting. That is the only way I know of to pocket the money you're "making." However, most people do neither of these things, and then brag about their equity. What are you going to do, get a HELOC to consolidate your credit card debt and give the banks a seizable asset on a golden platter?
I prefer to think of "owning" (remember, you don't own til the mortgage is paid off) a home as a purchase. A very large purchase. There are a lot of intangibles that I enjoy about owning my own home, and the tax deduction is usually enough to keep in one tax bracket lower, but I don't see it as a pathway to wealth.