Pros & Cons of Home Ownership | Homebuyer Education

Advantages and Disadvantages of Owning a Home

Home Ownership Pros and Cons

Buying a home is the biggest financial decision many people make. As with any major decision, a key question to answer before proceeding: Why?

Perhaps your why is a larger home to raise children, or have a yard, or get to a better school system, or in the time of COVID-19, to find a home office. There is no right or wrong answer, merely the best one that fits each individual circumstance.

“There is an emotional side to home ownership, particularly in the United States – it’s often baked into people’s vision of the future or part of the American dream,” said Tom Figgatt, president of Portolan Financial in New Orleans. “And it does feel good to own your own house; you can feel like it is a home and not just a temporary dwelling.”

The benefits of home ownership don’t come without costs and limitations. For some, renting may be a better option. The pros and cons of buying a house should be considered as you think through the process, and before a decision is made.

One recent significant consideration: The COVID-19 pandemic lit the housing market like a bottle rocket. Home prices rose in early 2021 at the fastest pace in 15 years. The most affordable homes rose 16.5% year over year. Too, homes are being snapped off the market with Usain Bolt-like speed, sometimes sight unseen.

The boom in sales and buying is expected to continue for several more months, at least. It’s great for sellers, provided they have found a home they can afford to buy. It’s not so great for those who may not be able to afford a down payment, or who can’t act fast. Buyers well positioned to make an offer can find their dream home; they just have to act quickly. In this housing market, there is no reward in hesitating.

Learn more about homeownership and the process of buying a house

Advantages and Disadvantages of Owning a Home

Before buying a home, it’s important to consider how the purchase will affect your finances and lifestyle. Review as many of  the advantages and disadvantages of becoming a homeowner before making the commitment.

What Are The Advantages Of Owning A Home?

  • A good long-term investment: Homes can lose value, but it doesn’t happen often. The Federal Reserve Bank of St. Louis reports that the average price of homes sold in the United States rose 28% in 10 years starting in 2009 and 10% from 2014 to 2019. In the same decade, the housing market added $11.3 trillion in value. With COVID-19 driving the marketplace, those increases will continue, at least through the short-term. If you are one of the unfortunate few whose value decreases, the land on which the home sits can become more valuable. You are investing in an asset for yourself rather than a property management company or landlord.
  • Low interest rates: Rarely will we see interest rates like we are seeing now. Rates can vary depending on credit score and where you are buying, but with the lowest rates at or near 2.75% the time may never be better to buy. This is also one of the reasons homes are selling so quickly. An interest rate of below 3% comes close to borrowing money for free. It’s not free, of course, but it’s close.
  • Building equity: Your equity is the difference between what you can sell the home for and what you owe. Equity grows as you pay down your mortgage. Over time, more of what you pay each month goes to the balance on the loan rather than the interest, building more equity.
  • Federal tax benefits: Mortgage interest is deductible on the first $750,000 of the purchase price of the home, as is interest on home equity loans, property taxes up to $10,000 if married ($5,000 if married filing separately) and some closing costs at purchase time. However, the increase in the standard deduction to $24,800 for married couples ($12.400 if single) makes it a little tougher to itemize those interest deductions. Calculating all these numbers prior to purchase will help show what tax benefits you can gain.
  • Greater privacy: You own the property so you can renovate it to your liking, a benefit renters don’t enjoy.
  • Home office: The work-at-home phenomenon may not vanish after the pandemic fades, which means more of us will need a home office. The right setup makes a difference in comfort and productivity. Those needing that work-at-home space can find it on the market – if they act quickly.
  • Stable monthly payments: fixed-rate mortgage means you’ll pay the same monthly amount for principal and interest until the mortgage is paid off. Rents can increase at every annual lease renewal. Fluctuating property taxes or homeowner’s insurance can change monthly payments, but that typically doesn’t happen as often as rent increases.
  • Stability: People tend to stay longer in a home they buy, if only because buying, selling and moving is difficult. Buying a home requires confidence you plan to stay there for several years.

What Are The Disadvantages of Owning a Home?

  • COVID costs: The housing market is ablaze, with sellers typically getting the asking price and more, and getting it in a hurry. This makes it tough for first-time buyers who may not have saved the needed down payment money. It also makes it tough for those who like to ponder big decisions.
  • High upfront costs: Closing costs on a mortgage can run from 2% to 5% of the purchase price, including numerous fees, property taxes, mortgage insurance, home inspection, first-year homeowner’s insurance premium, title search, title insurance, and points, which are prepaid interest on the mortgage. It can take about five years to recover those costs.
  • Less mobility: If one of the advantages of home ownership is stability, that means it may take more thought to accept an attractive job offer requiring you to pick up and move to another city. The offset to this concern is the speed with which homes are selling.
  • Maintenance costs: Contorting yourself to fit under the kitchen sink to fix a leak is a joy (not) for those who try it the first time. But when you own a home, you are the first line of repair – especially if you want to save money by doing it yourself, Bob Vila style. Some items do need professional attention. If the air conditioner goes out, you’re not only going to sweat until it’s fixed, you’ll also be writing a check to get the cool air flowing again. Some folks enjoy mowing the lawn; others don’t. That, and trimming the bushes, and cleaning the gutters, and shoveling the snow are all part of home ownership.
  • Equity doesn’t grow immediately: Most of the payments go toward interest in the early years of a mortgage, so you don’t gain equity quickly unless property values in your area skyrocket – and that has happened in many areas in the post-pandemic market. Those who want to build equity faster could apply a small extra amount to their principal each month, provided it fits the budget. Even $20-to-$50 extra every month specifically applied to loan principal can help.
  • Property values can fall: That happened during the 2008 nationwide housing crisis, and more local conditions can cause this, too. Your building will depreciate over time, especially if you don’t maintain it.
  • Continuing costs: As you try to sell your home, you still have to keep making mortgage payments and maintain it. If you’ve bought another house before selling yours, that means paying for two homes. The post-COVID sales fervor does help sellers unload their property faster, though.

Advantages and Disadvantages of Renting a Home

Home ownership might not be for everybody, at least not in every stage of life. Before you buy, consider whether that is right for you right now.

Advantages of Renting a Home

  • Rent payments may be lower: This certainly can be true if you’re renting an apartment, and it also may be the case when renting an identical house. If a mortgage is more than you can afford, renting makes more sense than being stretched too thin financially.
  • Repairs aren’t your responsibility: The property owner has to pay for that leaky faucet and anything else that breaks or wears out. So, you don’t have to factor those unplanned expenses into your budget.
  • Flexibility: Your obligation to a place you rent can’t exceed the length of the lease, and if the property owner can quickly find a new tenant, that can get you off the hook if you leave before the lease expires.
  • Low upfront costs: There is no down payment. Except for a security deposit – often the cost of a month’s rent – you don’t have to write a big check or finance the costs required to get a mortgage.
  • No HOA dues: Some homes are in developments with homeowner’s associations that require monthly dues on top of all the other expenses, and they aren’t optional. Not so with renting.

 Financial Disadvantages of Renting

  • You can’t change the property: Would you like a deck for entertaining? Would you prefer a fenced yard? Want to paint the bedroom a greyish blue? There’s nothing you can do about any of that in a rental, except complain; see where that gets you.
  • You aren’t building value: When you leave your rental, all you take with you is yourself and the furniture and dishes that belong to you. It’s the property owner’s equity that grows, not yours.
  • Rent may increase: You may be comfortable with what you’re paying each month, but that could change when your lease comes up for renewal, typically in six months or a year.
  • No credit score improvement: While paying a mortgage on time improves your creditworthiness, you don’t get the same benefit from rent.
  • No cosmetic improvements: If the home you are renting looks dated, you may just have to get used to it.

Owning vs. Renting

Own Or Rent Advantages Disadvantages
Homeownership Privacy

Usually a good investment

More stable housing costs from year to year

Pride in ownership and strong community ties

Tax incentives

Equity buildup (savings)

Long-term commitment

Maintenance and repair costs

Lack of flexibility

Usually more expensive than renting

High up-front costs

Foreclosure

Renting Lower housing costs

Shorter-term commitment

No/minimal maintenance and repair costs

No tax incentives

No fixed housing costs

No building of equity

 

In assessing the pros and cons, Figgatt suggests asking yourself three questions.

  1. Can you afford it?

“The down payment, closing costs and risk of sudden, very large expenses popping up combine to make it a very expensive proposition,” he said. “You need to save above and beyond your mortgage payment for infrequent yet major household expenses so that you keep it up properly. And making a smaller down payment and paying private mortgage insurance (which protects a lender in case you default on your mortgage) only increases the total cost of ownership.”

  1. How long do you expect to stay in the house?

“It can be difficult to break even on a house if you stay in it for three years or less; the closing costs and commissions are significant, and expecting the house to appreciate in value enough within three years to make up for those costs may be setting your expectations too high,” Figgatt said. “And remember that your entire mortgage payment does not go towards the home’s equity. During the first year of your mortgage, depending on the terms, perhaps only about 30% of the principal and interest payments will actually go towards the principal of the home.”

  1. Why are you looking to buy?

“If you’re looking at the purchase as an investment, it could work out very well, but high fixed costs mean the shorter the amount of time you hold the property for, the less likely you are to come out ahead relative to other investment opportunities out there,” he said. “Constantly buying and selling houses if you move frequently may be eating up wealth, not increasing it. And if you plan to rent the place out after you move, make sure you have a plan for managing the property – be ready to pay for that, too.”

Next Steps

Big financial decisions can be scary, and you don’t want to be paralyzed into inaction. InCharge Debt Solutions can help you think through the variables so you can decide if this is a smart decision right now. If credit issues stand in your way, InCharge can help you become a better candidate for a mortgage and save money on your payments. Take the first step here.

A mortgage calculator can help sort through costs and budgets. A rent or buy calculator helps sort through some of the financial issues.

Online homebuyer education courses can also be a great stepping stone for those looking into homeownership. You’ll learn how to prepare for owning a home and get a better understanding of the home purchase process, including how to finance and afford a home for the long term.


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About the author

In his 40-plus-year newspaper career, George Morris has written about just about everything -- Super Bowls, evangelists, World War II veterans and ordinary people with extraordinary tales. His work has received multiple honors from the Society of Professional Journalists, the Louisiana-Mississippi Associated Press and the Louisiana Press Association. He avoids debt when he can and pays it off quickly when he can't, and he's only too happy to suggest how you might do the same.