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Every financial decision you make in your life has its rewards and its risks. Home-buying is no different. The key, of course, is to maximize the rewards and minimize the risks. That calls for objectivity on your part. So, to help you make an objective decision, I've provided a list of both rewards and risks below. Review the list to see if you're a good prospect for owning a home!
Rewards
The "intangible" reward of buying a home is, of course, the joy of owning it and creating a home for your family. Nearly everyone desires this reward! However, there are also several concrete financial rewards that can be earned through home ownership.
The first financial reward is appreciation. In spite the recent "mortgage meltdown" and price declines, it's a fact that, on a historical basis, your home is worth more when you sell it than when you bought it. A home purchase is a great long-term financial investment.
Financial flexibility is the second benefit and is derived from appreciation. When your home appreciates, you can sell it at a higher price. You can then use the profit to buy a bigger and better home…tap into the equity (what your home would sell for minus what you owe on the mortgage)…pay college tuition for the kids…use it to fund your retirement…or any other goals you have in mind.
The third goal is leverage. Buying a home allows you to use borrowed money (the mortgage) to profit on later price increases (appreciation) on property you haven't paid for.
The fourth and final benefit is that of tax breaks! You can deduct property taxes and mortgage interest and keep up to $500,000 of capital gains!
So, as you can see, home ownership is a wise investment in your future!
Risks
As I stated earlier, every financial decision has its risks as well as rewards. Therefore, it's wise to know what those risks are upfront, so you can decide how you want to deal with them. Review the following risks to make sure you're ready for the responsibility of home ownership.
The first risk is a decline in value. We've seen this risk come true in the recent "mortgage meltdown." The value of homes declined from 2006-2009.
Although, historically, this doesn't happen often (and prices are on the rebound), it still tells you there's no guarantee that the value of your home will appreciate.
Over the long-term, however, home prices do tend to appreciate, and, believe me, home ownership is far less risky than the stock market!
The second risk is maintenance costs. It takes money to maintain a home - roofing, heating, cooling, siding, paint, etc. This fact means that you must have the income to pay for routine maintenance costs as well as the inevitable big-ticket items (water heaters, furnaces, etc.) that come with long-term home ownership.
The third risk is the loss of other investment opportunities. In the short-term, alternative investments (stocks, bonds, etc.) may give you a greater return in less time if their value rises faster than that of the homes in your neighborhood.
In such an event, you might do better as a renter or investor. However, keep in mind that, as stated above, this is a short-term strategy.
The fourth risk is lack of flexibility. Purchase of a home ties you down to a specific neighborhood and city. Many people like this fact because it allows them to "set roots" in a community. However, if you're a person who prefers to be "foot loose and fancy free," then home ownership may not be for you.
For example, home ownership doesn't make it easy for you to take a new job elsewhere or move to a different location. And, if you have to put the home on the market in a hurry due to a divorce, job loss, etc., then you can take a heavy financial hit.
The final risk lies in the fact that if you have a large mortgage payment, it can make it hard to invest money elsewhere (savings, investments, vacations, etc.).
So, there you have it - a complete list of the rewards and risks of home ownership. If you'd like help in analyzing how these factors apply to your specific situation, contact me at today!
