Buying your own house is one of the most important decisions you can make early in your life. Homes make an ideal first asset for younger buyers. Paying down a mortgage is financially prudent, as it helps build equity. There are also intangible benefits to owning a home that will appeal to those looking to escape the rental market.
Renting Versus Buying
First-time homebuyers might be hesitant about plunking down so much money to secure a house, but when you compare buying a house to renting one, any drawbacks of home ownership still look better than paying your landlord every month.
There are some benefits to renting a property. The pros of renting a home include the following:
- You can rent while still having bad credit.
- You’re not responsible for a mortgage.
- You’re not responsible for maintenance and repairs. When the roof leaks or the toilet breaks, you call somebody and they fix it.
- You don’t have to worry about whether or not you’re living in a neighborhood that depreciates or is no longer considered a “hot” market.
- You don’t have to pay property taxes.
However, there are more cons to renting a home:
- You will likely pay more per month in rent than for a mortgage on a comparably priced house. A homeowner has to pay for the mortgage on their property, plus taxes, while a landlord has those same costs plus the margin they want for a profit.
- In an apartment, you usually share walls (and floors and ceilings for multi-level units) with neighbors.
- You’re not building any equity while you rent. You’re helping someone else build their equity.
- You have more limitations in a rental setting. You probably won’t be allowed to bring a larger dog into your property, and your apartment might not even have a yard for it to play in. You might also miss out on other freedoms, such as being able to paint your residence any color you want.
- Your rent could rise at any time.
- You might get the proverbial “landlord from hell” who doesn’t fix issues promptly and doesn’t maintain their buildings. Even more stress-inducing is dealing with absentee landlords who refuse to fix up rundown apartments.
- The rental owner could decide to sell at any time. Even if you have lived there for years, a sudden change in the owner’s circumstances can leave you with short notice that you have no place to live.
The list of pros of home ownership is short but significant:
- You’re creating an asset by paying down your mortgage.
- You have a vested interest in choosing and maintaining your neighborhood. If the property appreciates, you’re the one who benefits.
- You have creative control regarding what kind of construction and renovations you want done to your house.
Prospective buyers should also be alert to the cons of homeownership, such as:
- You have to pay for repairs, taxes, and insurance.
- You have an asset that can go up or down in value, so there is some financial risk involved.
- The benefit of owning a home is somewhat reduced if you aren’t sure you’ll be staying in the neighborhood for at least five years. Renting still might make sense if you’re not able to make a long-term commitment.
- You’re on the hook for a mortgage. Buying a house is a big commitment. If you were to buy a house and then find out the next year that you’re getting a new job in another city, you’d have to sell that house before you buy another one. It’s important to think about how committed you are to staying in that location.
As the housing crisis of 2008 showed, no one can predict the future housing market. Many people felt secure enough to finance their homes but had to walk away from them when they could no longer afford the payments. Home ownership is a big responsibility that requires you to be financially stable enough to handle that commitment.
Your Home is an Asset, Not a Liability
While it’s true that no one can predict how financial markets will fare in the near future, it’s nice to have a house as an asset in your portfolio. Even If you only intend to stay in your home for three years before selling, you might still make a profit when you decide to leave your home. Assuming your home appreciates at rate of 3 percent per year, selling after the third year should net you enough to make a profit, even after real estate agent and other transaction fees.
The longer you hold your property, the better your chances of making money when you eventually sell. But you shouldn’t think you’re a slave to your previous house if you want to move elsewhere. As long as it’s in a decent neighborhood, buyer demand is likely to be strong. Your house can also make you money by renting it after you’ve moved out. The rental income will usually be able to cover your mortgage payment, with some remaining for profit.
Can I Afford to Buy a House?
There are houses aimed at all types of demographics. If you’re worried about being able to afford a house in a good neighborhood, try getting it at a discount; perhaps the listing has expired, or the property just needs some basic renovations. Another scenario is when the house is desirable, but the seller is motivated to sell because they’re in foreclosure or have some other type of emergency. It’s not always wise to buy the nicest house in a neighborhood. Instead, try to buy a house that needs some TLC in a nice neighborhood. With a little sweat equity, you can renovate that house and boost its value.
To find out how much house you can afford, work backward from what your desired monthly payments will be for your mortgage. You can use an online mortgage calculator to find out how big of a mortgage those monthly payments translate to. Take a look at houses that are listed around your target price in desirable neighborhoods. If the market is not hot for sellers, you can submit offers on multiple houses that are below the asking price.
Buying a house gives you a place to live. Paying off your mortgage will gradually increase the asset value of your house. Every time you pay rent, you’re burning money, because money that goes to your landlord is not building your asset. However, by buying a home while you’re still young, you will benefit when your home appreciates in value as you move through life.
Photo: Jesse Roberts / Unsplash