The real estate market has been buzzing for the better part of a year now. Homes, at least here in Monmouth County New Jersey, are flying off the market – usually for over asking price! Homeownership is becoming a reality for a lot of folks lately.
Buying a home is one of the biggest financial decisions that you will make in adulthood and for many people, this may be seen as a part of the “American Dream.” While it can feel good to own something rather than rent, it’s not for everybody and can come with costs and limitations.
We wanted to take some time today to discuss the advantages, and disadvantages of homeownership.
Advantages of Homeownership
#1: Long-Term Investment
The words “long-term” here are very important. It’s important to think long-term during the homebuying process. If you plan on leaving your home in five years or less, homeownership may not be for you. Giving your property five years, or more, will give you more time for your home to grow in value.
Plan on maintaining or improving the condition of your property, as this is what makes for a good long-term investment.
#2: Building Equity
Equity is the difference in the value of your home and what you still owe on it. Every time you put a payment toward your mortgage, your home equity grows. Equity is important to have, as it can help you build wealth over time. As opposed to renting, the equity you build in your home is YOURS. You own it.
#3: Stability & Consistency
Obtaining a fixed-rate mortgage means that you will pay the same amount each month for interest and principal until the mortgage has been paid off. Conversely, rent can increase with every lease renewal or move. Having a stable mortgage payment can help you avoid increases in your housing expenses.
When we build financial plans for people, it always starts with cash flow. Having consistent housing payments each month makes building an accurate cash flow statement that much easier.
Since you own the property, you can renovate it however you want. Since renters do not own their property, they don’t get much of this benefit. Any landscaping or home alterations wouldn’t be up to them. Homeownership gives the owners the ability to add value to their home over time with improvements to the inside and outside of the property.
Disadvantages to Homeownership
#1: Upfront Costs
On top of the down payment, homeowners need to account for closing costs as well. Depending on the price of the home, closing costs can be a significant amount of money.
Some closing costs include:
- Property taxes
- Mortgage insurance (if less than a 20% down payment is made)
- Home inspection
- First-year insurance premiums
- Title search
- Title insurance
While a down payment is important, it’s not the only cash you’ll need upfront in order to purchase a home. If you’re purchasing a $300,000 home, closing costs could easily range between $6,000 and $15,000.
#2: Less Flexibility
If you have a job that requires you to move often, going through the process of homebuying may not make financial sense. It can take weeks or months to buy and sell a home. You don’t want to end up in a situation where you find yourself paying two mortgages if you need to relocate quickly but cannot sell your current home in time.
This problem ultimately goes back to the “long-term” nature of homeownership.
#3: Maintenance Costs
While customization is advantage, home maintenance can sometimes be a disadvantage. If something breaks in your home, you are the one that must pay for the repairs. There is no property manager or landlord involved when you own your own home.
#4: Property Values Can Fall
Generally, home prices appreciate over time, but that is NOT a guarantee. If you do not maintain your home – or if the housing market takes a downturn – your property value could fall. There are a number of factors both in your control and outside of it that could affect this.
#5: Home Costs Lack Liquidity
While houses do have value, they usually do not sell as quickly as stocks or other assets. If liquidity is a major concern for you, tying up a large percentage of your funds in a home may not be the best idea. Even if you are in the process of trying to sell your home, you still have to maintain your home and make mortgage payments.
When it comes to financial decisions, it’s never one-size-fits-all. Homeownership is no different. Every situation is different and requires a thorough analysis before making any big, life-changing decisions. If you’re overwhelmed trying to figure out if homeownership is right for you, we would be happy to help. Feel free to click here to schedule an initial call with one of our team members. There is not cost or obligation.
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