Personal Homeownership Issues to Consider Before You Buy Your First Home

 

Owning a home has historically been a big part of the American Dream, but the reality is that homeownership may not be for everyone.  For personal and practical reasons, some people are happier or better off renting.

Buying a home is an investment; and for first-time homebuyers, it can often be a complicated and hectic process.  However, it can also be a most rewarding investment.

Before undertaking this home-buying venture, it is crucial for the prospective homebuyer to seriously consider the advantages and disadvantages of home ownership.  You may decide, upon reviewing the pros and cons, that home buying is not right for you at this time.

But if you do decide that homeownership is right for you, you must enter the home-buying process with a clear understanding of the benefits and costs of this part of the American Dream.

• Advantages
• Disadvantages
• Personal Considerations

Advantages

For most homebuyers, the chief advantages of homeownership are independence from a landlord and the financial savings of no longer wasting your money on rent.  Those two attitudes are part and parcel of the advantages discussed below:

• Historically stable investment
• Tax deductions
• Opens door to further financial opportunities
• Pride and security of home ownership

Historically Stable Investment

Unless something changes dramatically, land is essentially a finite supply.  Practically all real estate will appreciate over the long run.  The appreciation will vary depending on the usefulness or marketability of the neighborhood and subject property, and as we have seen, there may be periods of depreciation in certain areas.  But over the long run, real estate tends to appreciate.

History, especially in the past few centuries, has recorded clearly the investment potential of real estate, especially within and around urban centers.  Real estate has also proven itself to be an excellent hedge against inflation, as property values in most urban areas have tended to outpace the rate of inflation.  Nevertheless, like all investments, there are both opportunities and pitfalls.

Tax Deductions

Perhaps the most attractive financial feature of modern American homeownership is the potential for tax deductions.  Homeowners are allowed to deduct the interest and points they pay on their mortgage loans, as well as their property taxes. This will be covered in more detail in the “Homeowner Deductions” chapter of this guide.

In addition, property investors are allowed to deduct depreciation and certain expenses from their real estate investment.  Consequently, mortgage payments allow the homeowner to both get their money’s worth and their money back.

Opens Doors to Financial Opportunities

At the birth of our nation, much of the power, money and prestige tended to rest with the property owners.  Although voting rights are no longer limited to just property owners, it’s not so much different today.

Even the purchase of a small, inexpensive condominium offers the new homeowner with plenty of opportunities not afforded to apartment renters.  For starters, homeowners are able to obtain larger debt consolidation loans and other credits much more easily than can renters.

Entrepreneurs often find that banks are more willing to lend business loans when the borrower has a home, which can be used as additional security.

Moreover, the first home or property purchases has traditionally led to future purchases of larger, more expensive properties.  You may only afford to make a 5% down payment today; but five years later when you sell your home, your profits will probably translate into a much larger down payment on your next purchase.

Pride and Security of Homeownership

Even though it is difficult to quantify the effect of pride and self-confidence, they are still important and common results of homeownership—especially for first-timers.

There is also the sense of security, as the property becomes a dynamic tool for collateral and opportunity (see preceding advantage) for the homeowner.  You no longer have to depend on a landlord or property manager to feel satisfied or safe.  Moreover, with the advent of reverse mortgages, real estate can now supplement pensions for senior homeowners—without sacrificing their homes.

Disadvantages

The advantages of homeownership are clear.  But such benefits come at a price.  The prospective homebuyer must consider all of these before embarking on a potentially expensive and time-consuming endeavor.  The primary disadvantages of homeownership include the following:

• Responsibility for maintenance & repairs
• More up-front costs
• Tie up liquid assets
• Possibly smaller short-term gains

Responsibility for Maintenance & Repairs

With independence comes responsibility.  It’s been true throughout our lives, it’s no different with homeownership.  As a homeowner, you can no longer depend on your property manager to fix your plumbing, change your light bulbs or repair your stove.

Homeownership has unforeseen responsibilities such as cleaning the basement when the sewer backs up, as well as regular responsibilities such as raking the leaves and mowing the lawn.   Are you ready for these additional responsibilities and tasks?

A common trend has seen senior homeowners selling their homes and moving into more convenient condominiums or apartment communities, which no longer require constant maintenance.

More Up-Front Costs

You will need money for the closing costs and prepaid expenses, in addition to the down payment.  Average closing costs and prepaid expenses add up to almost 3%-5% of your purchase price.  The typical home purchase adds an additional 5%-10% down payment to your funds requirement.

Do you have that kind of money?  If not, there are other loan programs with no down payment and no closing costs options.  However, they cover their increased risk exposure (of lending to someone with no proven ability to save money) through their increased pricing and interest rates.  As you can see, buying a new home is much different than moving into a new apartment.

Tie Up Liquid Assets

By investing in real estate, you often must turn some of your liquid assets (cash or equivalent) into hard assets.  Real estate values may appreciate and thus provide you with “profit,” but such profits are only projections until the property is sold.  Depending on the current market, reselling the property (especially at a profit) may take one week or one year.

Can you afford to tie up your assets in your home?  Are there other major purchases or expenditures (boat, car, vacation, wedding) on your near-term wish list?  If you cannot afford to use your assets as a down payment for your home, then you may prefer to continue renting and wait until you have saved up enough money.

Smaller Short-Term Gains

Even though bargains can be found in the real estate industry, overnight profits are usually difficult to uncover.  Moreover, steady appreciation is never guaranteed.

For example, my parents bought their home when I was 12 years old for only $17,000.  Almost 29 years later, it is worth almost 20 times as much.  However, the bulk of that appreciation came before the current crisis.  By the same token, there are homeowners in other parts of nation who have seen their property values actually decrease.

If you decide to resell your property within a couple of years, your net profit will probably be minimal.  However, results vary, and the leading prognosticators are location, location and location.

If the property is currently in or soon will be in a high-demand area, you will likely see favorable appreciation.  On the other hand, high-crime areas or school districts with abysmal reputations tend to have a slower pace of appreciation.

Personal Considerations

In addition to the above considerations, buying is naturally full of personal emotions.  As much as we try to encourage homebuyers to try to look at the house as an investment, there is no escaping the deeply emotional aspects of home buying.  It’s a key ingredient of the American Dream.

To ensure that your heart and head are on the same track, you should also consider the emotional aspects of buying a home:

• What do you like and dislike about renting?
• Why is homeownership important to you?
• How does homeownership fit into your long-term goals?
• What kind of practical demands will homeownership place on your energy and time?  Can you handle those demands?
• Can you handle the responsibility and commitment of housing payments?
• Are there other large purchases in the near future that are as or more important to you?
• Is your entire (immediate) family with you on this decision?

 

Decision: Rent

If you decide that you are currently better off renting your home, don’t be discouraged.  A decision not to buy now often translates into a better home purchase decision and process later.

You can also plant the seeds for a future home purchase or current property investments, through a Lease-with-purchase-option or other alternative real estate strategies.

Decision: Buy

If you decide that you do want to pursue this home-buying path further, then your next step is to consider your home-buying goals and objectives, as well as contact a real estate agent.