If you are considering buying a house, the first step is to determine whether or not it really makes sense for you to buy or continue renting.
Yes, buying a house will probably be the most expensive single item purchase you ever make, and it may take you 15 to 30 years to pay off the mortgage. But if you wait too long to buy a house, home prices will inevitably go up and you could unintentionally lock yourself out of the real estate market (if housing costs surpass your ability to earn and save money) and you may fall further and further behind.
Everyone’s situation is different ― for some, renting is the best strategy and for others, it is smarter to buy a house. The key is determining which is best for you and your lifestyle.
As you contemplate buying a house, consider the following questions:
- Are you financially prepared? In order to buy a house, you will probably need to get a mortgage loan. In order to get the best mortgage, you will need a good credit score, steady/stable employment, and money for a down payment (20% is generally ideal). It is never a good idea to spend all your money on buying a home ― you will be much better off if you have extra savings and know how to manage your finances.
- How long do you plan on living in your new home? If you can’t commit to staying in one place for five to seven years, then owning is probably not for you (at least not yet). In general, it can take four to six years (or more) for a home to appreciate in value ― if you sell any sooner, you will most likely end up losing money (due to the transaction costs of buying and selling, and/or capital gains taxes).
- Is it the right time to buy a house? Research home prices in the neighborhood(s) you’re interested in and stay informed about current mortgage rates. The more you know, the more money you can save and the easier it will be for you to make smart decisions.
- Are you psychologically prepared? The home buying process can be stressful and there’s a lot of information to grasp. And once you graduate from homebuyer to homeowner, a whole new set of challenges await ― unexpected repairs, disrespectful neighbors, and the everyday responsibilities of maintaining a home. You’re going to have to do your best to be organized, refrain from making snap-decisions, and stay calm.
The Pros and Cons of Buying a House
Owning a home is a long-term commitment with many advantages and disadvantages. Being aware of these factors will help you determine if buying a house is the right choice for you.
PRO: The Pride of Ownership. This is the main reason people dream of buying and owning a house. It gives you a sense of comfort, security and stability. Your home is a reflection of who you are, and working on a house to make it your own can be a very gratifying experience.
PRO: Your House, Your Rules. You own the property so you can basically do whatever you want to it. You can paint the walls, hang fixtures and frames, plant trees, even knock down walls or add rooms. There are no nosy landlords, upstairs neighbors, communal laundry facilities, or shared garages. You truly have your own space, and more of it.
PRO: Tax Benefits. The IRS allows homeowners to deduct part of their mortgage interest, property taxes, and mortgage points on their returns as itemized deductions. Those who are looking to sell their homes may be eligible for the capital gains exclusion. A “single” taxpayer who has a gain from the sale of their primary residence may be able to exclude up to $250,000 of that gain from their income (that amount is doubled for married couples). This exclusion may be used once every two years.
PRO: Appreciation/Build Equity. Your house is both a home and an investment. Buying a house is a good way to build equity because home values typically rise over time as your mortgage balance shrinks. Renting, on the other hand, builds no value ― it’s like paying someone else’s mortgage. A homeowner’s wealth is built in two ways: with mortgage payments (which force you to save) and the home’s appreciation (the increase in its value over time). Historically, homeowners accumulate far more wealth than renters do.
CON: Huge Responsibility. It may seem obvious, but home owning involves many responsibilities. Any problems with the house are your problems. If there’s an issue with the plumbing or insulation, it is your responsibility to recognize it, fix it, and pay for it. Additionally, unless the house is move-in-ready, it can take years to make it exactly how you want. As you’re dealing with repairs and renovations, keep in mind that cutting corners or using less expensive materials can end up costing you more in the long run.
CON: Actual Cost. The actual cost of buying a house is much more than the amount you agree to pay for it. You have to consider all the expenses associated with the homebuying and home owning process (including mortgage insurance, homeowners insurance, closing costs, escrow accounts, property taxes, and other fees). You should also have money set aside for unanticipated expenses. If the pipes burst or the roof leaks, you’ll be glad you planned ahead.
CON: Weak Tax Benefits. The truth is, about half of the country’s homeowners get no tax benefits. If you do qualify for a tax credit or tax deduction, it may be lower than you think. Itemizing deductions (mortgage interest and points) is a waste if those deductions, when added together, are less than the allowable standard deduction. If you are eligible for a sizeable deduction now, keep in mind that it will likely shrink over time because most mortgages are designed so borrowers pay less interest, and more principal, with every passing year.
CON: Lack of Freedom. As a homeowner, you can’t move quickly, easily or cheaply. If you decide to move too soon, the house will not have appreciated in value and you could end up owing more on the house than it’s worth. There are also transaction costs associated with selling a home, not to mention the stress of moving (again).
Bad Reasons to Buy a House
- Don’t buy a house because you’re “tired of throwing money away on rent.” You’re not actually throwing money away ― you’re paying for a place to live. Granted, as a homeowner you will be building equity with each mortgage payment, but that can be offset by money that is “thrown away” on maintenance, repairs, insurance, taxes, and mortgage interest, which renters do not pay.
- Don’t buy a house solely for investment gain. Your house’s primary function should be as a home. While home values typically rise over time, there’s no way to actually predict the performance of the real estate market. If you’re looking for the best return on your money, history has shown that the stock market is a better investment.
- Don’t buy a house because you want the tax deduction. As discussed earlier, the tax benefits for homeowners aren’t really substantial enough to completely warrant a home purchase. It’s smarter to view tax breaks as a little extra incentive, not the main driving force.
More suggestions:
• Don’t buy a house if you have credit card debt.
• Don’t buy a house if you don’t have medical insurance.
• Don’t buy a house if there’s a good chance that you’ll be laid off soon or if you plan on leaving your job soon.
• Don’t buy a house unless you have money set aside for emergencies.
As you weigh the financial pros and cons of owning, keep in mind that buying a house is also a very personal and emotional decision.