Pros and Cons of Homeownership
There are several potential benefits to homeownership, but, of course, owning a home comes with other considerations, too. Understanding both sides of the equation will help you determine if homeownership is right for you.
Building home equity.
Your Glossary Term: home loan payment
is made up of Glossary Term: principal
, which is the portion of your Glossary Term: monthly payment
that reduces the loan balance, and Glossary Term: interest
, which is the cost of borrowing the money on your home loan. The more principal you pay on your home loan, the smaller your loan balance. Home Glossary Term: equity
is the difference between the Glossary Term: market value
of your home and your outstanding loan balance, so the smaller the loan balance the more equity you are building (assuming the home value has not decreased, see below). Buying a home does not automatically increase your personal wealth, but paying off principal and benefitting from increased home equity can increase your personal wealth.
Potential appreciation. Recent history has shown us that home prices can fall (Glossary Term: depreciation). Although there is no guarantee of home Glossary Term: appreciation, home prices historically tend to go up over time. If you stay in your home long enough, you might benefit from appreciation, especially if the house was a good value when you bought it and you maintain it well.
Potential tax benefits. The Glossary Term: interest, on your home loan and your Glossary Term: property taxes may be tax deductible, making the actual cost of your Glossary Term: mortgage seem less than the amount of the check you write. To learn more, read Tax considerations of homeownership. And definitely consult your tax advisor about these potential benefits.
Home equity loans and lines of credit. When you have enough equity built up in your home, you might be able to take out a home equity loan or home equity line of credit to pay for things like college, medical bills, or other expenses. Not only does it offer you access to available equity when you need it, the interest on a home equity loan or line of credit may be tax deductible. Again, contact your tax advisor about interest deductibility.
Stability. Owning a home can offer the stability of knowing where you will be living. For some of us, putting down roots and having that sense of ownership is important.
When you take out a mortgage, you agree to making a monthly payment in full and on time—today and into the future. This monthly payment should be one you feel confident you can afford.
Extra expenses. Principal and interest are just part of your financial commitment. There are also property taxes, Glossary Term: homeowners insurance, Glossary Term: homeowners association dues and Glossary Term: assessments (if applicable) and, if you put down less than 20% on a conventional loan, typically Glossary Term: private mortgage insurance. In addition, there are Glossary Term: closing costs associated with closing your loan. Make sure you take all these expenses into account when deciding if owning a home is right for you.
Maintenance. Maintenance is easy when you're a renter. You just call the landlord and have them take care of it. When you own your home, however, you're footing the bill for everything from small expenses, like a clogged drain, to big expenses, like replacing a roof. Having the home inspected prior to buying is a good way to predict what expenses might be on the horizon, but some expenses can't be predicted.
Emergency fund. The bottom line is that if anything goes wrong with your house, it's your responsibility. Furthermore, if you lose your job, you still need to be able to pay your mortgage. Be sure to have an emergency fund saved up.
If you feel like your finances today and into the future are a good match for homeownership, get a head start by learning more about the home buying process. On the other hand, if it's not the right time for you right now, keep these things in mind for a later date. You may find buying is a better choice for you down the road.