Owning your own home has been part of the "American Dream" for
years. The pride of ownership and sense of belonging somewhere have been
strong factors in motivating over 60% of all households to own their own
home. In addition, there can be true financial rewards from home ownership.
But, not always.
Here are some financial issues to consider as you move toward that
"American Dream" of owning your own home.
Home values have risen substantially in most parts of the country over the
past decade. With a strong economy, the demand for housing has pushed up the
prices people have been willing to spend. These rising values have enabled
many to reap large profits when they sold their homes. However, home values
do not always appreciate and certain areas can be dependent on the local
economy for housing demand. Ask anyone that tried to sell a home in 1990 in
Hartford, CT and they will tell you that it is painful to sell a home when
the local economy is suffering.
If you plan to stay in an area only a short period, renting may be
economically advantageous. The costs of buying a house (realtor's commission
and closing costs), moving (hiring a mover or renting a truck) and getting a
mortgage (points and loan origination costs) can add up. If the value of the
home has not risen by that total when you are ready to sell, you will end up
losing money.
If you have a great apartment and a great deal on rent, it may be very
difficult to own the home you want at anything close to your current costs.
Now some good news
If the value of the home you buy goes up, you can profit in a leveraged
way. Let us assume you buy a home for $150,000 with a $25,000 down payment
and then sell the home for $175,000 (after all costs). Your cash proceeds
would be $50,000, or a doubling of your actual cash investment. In other
words, the home appreciated about 17% and you made 100% on your money.
Remember that leverage works in reverse if prices fall.
There are tax advantages with owning your home. Many homeowners are able
to itemize deductions for mortgage interest and property taxes on their home.
This can result in savings when you file your tax return. The IRS also allows
you to defer any taxes on any gain on selling your home if you buy another
more expensive home within a given period. There are also tax breaks on gains
if you are over age 55 when you sell your home. It makes sense to investigate
these tax advantages or talk to a tax accountant to completely understand the
tax advantages.
You build up equity in your home as you make mortgage payments. Every
mortgage payment you make includes interest and principal repayment. Over
time, the principal repayment reduces the remaining amount you owe. In the
first few years, most of your payments will be interest. It is in later years
that your equity build-up really takes hold. Here is a chart showing how your
mortgage payments slowly convert from mostly interest to mostly principal
over the life of a 30-year mortgage.
Here is a chart showing how the interest and principal portions of a
$100,000, 30 year mortgage change over time. Notice that the majority of the
principal repayment comes later in the life of the mortgage.
Home ownership provides financial flexibility. Your home may be the most
valuable asset you own. It can serve as a reflection of your financial
stability and it can even be a source of collateral for other borrowing. With
a Home Equity Loan, you essentially are pledging the equity in your home for
additional borrowing. Home equity loans can be a low cost way of
consolidating any other debts you have, perhaps at a lower interest rate and
probably get some income tax benefits along the way.
Summary
If you are like millions of others, owning your own home is a primary
financial and lifestyle goal. The pride of ownership and the financial
rewards are attractive. Just make sure you understand that there can be some
downsides before you make the decision.
