by Stacy Francis, CFP®, CDFA
With all of the excitement in real estate lately, you might be wondering if you should take the plunge and buy a home. Homeownership has many advantages – both financial and personal. But there are many things to consider before you jump in and make your purchase. Here we take a look at some of the benefits and expenses of owning your own home.
Firstly, the differences between renting and homeownership are:
Tax savings There are possible tax savings to be derived because you can deduct mortgage interest and property taxes from your federal income tax and many states’ income tax if you itemize your deductions.
A more stable monthly housing expense Depending on the type of loan you choose, you may be able to budget your finances more definitely. If you choose a fixed rate, your monthly housing loan or mortgage expense can remain the same for the life of your mortgage.
Equity Equity is the difference between the fair market value (appraised value) of the home and the outstanding mortgage balance. It is possible to build equity in your home over the life of your loan. This will allow you to plan for future goals like your child's education or your retirement. But be careful, there are advantages and disadvantages to using the equity.
While there are advantages such as tax savings and equity, owning a home can cost a lot. Homeownership may not be right for everyone. You may not be in a situation in life where you are able to make the big commitment that is associated with owning a home.
So what are the risks of homeownership?
Monthly housing expenses can increase If you’re not careful, your monthly mortgage payment may be larger than your rent. While these higher monthly payments may be offset by a tax benefit at the end of the year, it is still a lot of money to let go at the time. It is recommended that you talk to a tax professional to understand your particular situation.
You become your own landlord This may sound like a good thing, and it certainly has its advantages, but being your own landlord means more responsibilities. If an appliance breaks, you will have to pay for its repair or replacement. You are also responsible for the maintenance and upkeep of your home and your property.
You must sell your house to move Owning a home is a big deal. If you decide to move one day, it isn’t as easy as packing up and leaving. Depending on the local real estate market, you might not be able to sell your home quickly.
Property values can depreciate Like with most products, the minute you purchase it, its value could depreciate. You can lose value in your home for a number of reasons, such as a recession, the condition of your home not being kept up, or a drop in a neighborhood's home values. If your home loses value and you have to sell it for less than you owe, you will be required to repay the full mortgage.
Overall, homeownership is a good investment for most people, but there are risks. If you understand the benefits and risks of homeownership, you can make the best decision about when to buy a home.