Do you dream of becoming a homeowner? You aren’t alone. It’s a common American Dream. It’s a very large investment – possibly one of the largest in your life. With the right knowledge, it can be great. It can also quickly become your biggest nightmare. Learn the pros and cons of being a homeowner to help you decide what’s right for you.
The Pros of Being a Homeowner
First, we’ll look at the positive side of being a homeowner. You should consider many benefits.
A Great Investment
The right home can bring a great return on your investment. You gain equity with every payment you make. Your entire mortgage payment doesn’t affect your equity, though. Just the principal you pay. When you apply for a mortgage, look at the breakdown between principal and interest. The principal is money you pay back towards your loan amount. The interest is money the bank charges for the money you borrow. You can make the minimum payment or even pay more towards the principal each month. This helps you own the home even faster.
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If you are lucky, the home’s value will appreciate too. There’s no way you can predict if this will happen. If it does, though, it provides a great return on your investment. Let’s say you live in the home for 5 years. During that time it appreciated $10,000. You can then ask $10,000 more for the home than you bought it for when you sell it. In a seller’s market, you’ll get close to your asking price, providing a great return on your investment.
Tax Deductions
Owning a home provides you with certain deductions on your tax returns. In most cases, you can deduct:
- Interest on your 1st mortgage
- Property taxes on your owner occupied property
In some cases, you may deduct interest on a 2nd mortgage. You can often deduct the interest on any 2nd mortgage used to purchase the home or renovate it. There are strict rules regarding this, though. Your tax advisor can help you determine if the interest is deductible.
Build Good Credit
If you make your mortgage payments on time, it can improve your credit score. A mortgage is a large loan. Paying it down and on time, can help other creditors see your financial responsibility. This may help you with future creditors, should you need a car loan or any other type of loan.
Make Changes
Making your house a home is easy when you own it. You don’t have a landlord telling you what you can and can’t do. You are in complete control inside and outside the home. Of course, you must abide by the city and county rules. Usually, though, you are free to do what you want. The exception to the rule is any major renovations. Additions inside or outside the home often require a permit from the city to make sure the home meets applicable codes.
Build Roots
Buying a home often means you stick around for at least a few years. This helps you build roots within the community. You can build deeper relationships and have a sense of belonging. When you rent, you often bounce around. It’s hard to make solid friendships or feel as if you belong in a specific community.
The Cons of Being a Homeowner
With the good must come the bad. Here we discuss the potential downfalls of being a homeowner.
It’s Expensive
Owning a home means more than paying back the mortgage. You are now responsible for all maintenance and upkeep. You don’t have a landlord who can come over in the middle of the night to fix the leaky plumbing or broken furnace. It’s all on you. Budgeting unforeseen emergencies into your monthly expenses must occur. You can’t predict when something will break and need repair.
Along with maintenance, you are responsible for all bills regarding the home. Taxes, utilities, and homeowner association dues are just a few examples. When you rent, you only pay the rent and possibility a utility bill or 2. Owning the home means you are responsible for everything. Knowing the average costs for the area can help you budget correctly.
Moving is More Difficult
If you decide you don’t like the community you live in, you can’t just pick up and leave. As a renter, you could leave at the end of a lease with no strings attached. Moving as a homeowner means putting your house on the market, selling it, and then moving. It could take months or even longer to sell your home. Some homeowners put their home on the market and never sell it. Before you make the investment in a home, do your research. Make sure you love the community and know a lot about it before settling.
You May Experience Payment Shock
A mortgage can be very expensive. Depending on how much rent you paid, the payment shock can be too much to handle. Make sure you know everything about your mortgage payment before taking a mortgage. There’s principal and interest. There are also real estate taxes and homeowner’s insurance. The combination can be significantly higher than your rent payment. Look closely at your budget to see how it will affect you financially.
It’s a Risky Investment
Owning a home can be a great investment when times are good. As we saw in the housing crisis, though, this isn’t always the case. What happens when housing prices decrease? You lose out on your investment. You can even land upside down on your loan. This means you owe more than the home is worth. You can’t just walk away from it. You are still on the hook for the mortgage payments. This may mean you must stay put for many years before seeing a return on your investment. This isn’t always a homeowner’s plan. Losing thousands of dollars probably isn’t in the plan either, though.
Your Credit is at Risk
We already discussed how your mortgage payment could help your credit. If you don’t make your payments, though, it can hurt it quite a bit. Even if you lose your job or become ill, you still must make your mortgage payments. One late payment can negatively affect your credit score. If you stop making your mortgage payments and go into foreclosure, it can affect your credit for many years ahead.
The Final Word
Being a homeowner is a great opportunity. It has many benefits. It also has some downsides. Knowing both sides of the equation can help you make smart choices. Don’t get in over your head. Only borrow what you can comfortably afford. Also, work closely with your lender. Determine all options you have for a mortgage. Don’t assume the lowest interest rate is the best choice. What if it’s an adjustable rate? You may not be able to afford the payments when the rate adjusts.
Do your homework before buying a home. It’s the best way to ensure a good decision. Research the community yourself. Also, pay for the home inspection and appraisal. Pay close attention to the reports. This helps you understand what you are buying. Is it a home that will need a lot of work in the near future? Make sure you can afford it. Lastly, make sure you understand the mortgage. This is what affects your credit and future ability to own a home.
If all the pieces come together, being a homeowner can be a great experience and investment!