The American Dream is a tempting one. It tells the epic story of a young person growing up, working hard, and developing financial and personal success for both them and their family. It is a narrative told over and over again, expressed to us in books, music, television, and art. A quiet life. A white picket fence lining the edge of your property. A loving family. Peace.
A crucial component of the story being building/buying and owning a house on the perfect piece of land. As you continue to progress in your life and career, you may feel that owning a home is the natural next step but that is not always the case.
A home is an investment, and a large one at that. The housing market can be fickle, expensive, and time-consuming, making the hat of a homeowner not a one-size-fits all. I’d like to discuss with you today the monetary baggage and weight that accompanies owning a home. Examine these points carefully to help you make the right decision on if and when there is a right time for you to own a home.
Where The Heart Is
Houses require a lot of time, energy, and money to keep them running. But I know that they also require love and care. They are the places that you build memories: your child’s first birthday, your first time hosting Thanksgiving, the time your family fell asleep on the couch during movie night. Houses are places for the heart.
One of the primary benefits to owning a home is the equity you are able to acquire through it. Equity can be defined as the amount of ownership in an asset after subtracting all of the debts associated with that asset.
Equity = Total value – Total liability
Calculating the equity in real estate is to look at the property’s fair market value and the amount that the owner still owes on the mortgage payment. Home equity is the amount of money that is received after the homeowner makes a sale and pays off any outstanding costs. This can also be thought of as the real property value.
Building equity in a house is an attractive option for many potential home-buyers. Instead of paying a set amount of money in rent each month, the money that you pay for your mortgage is an investment in the home, which could lead to an increase in equity over time. If the home accumulates enough equity, it can result in a large financial increase for the homeowner which could be put towards another large purchase such as a new home.
Ownership and equity are often discussed in the same vein. A home’s equity comes from the amount of the home that the owner actually owns, meaning the amount of money that they owe versus the amount of money that has been paid. For example, if a couple is only 2 years into their 30-year mortgage payments, they have not accumulated equity in the home as they still owe more than what they have paid. Equity is also a homeowners’ largest source of collateral which could help them in receiving a home equity loan, most often known as a second mortgage or home-equity credit, if need be.
A House Is Not A Home
Though there are some compelling investment opportunities to buying a home, it is also important to weigh the costs.
Equity is a great source of investment, but that is not a good enough reason to break the lease for your apartment and buy a house. Why not? A mortgage is debt. This is a powerful reality that many young first-time home-buyers don’t think about. A mortgage is a 30 year commitment (at least) and a house payment is a debt. Even if this debt comes with some additional benefits, it is good to see it for what it is.
Owning a home comes with more costs than the payment you have to make on your mortgage each month. There are many other cost-factors to consider:
- You can’t just sign in to your electronic resident portal, submit a maintenance request, and then forget it ever happened. Any work that needs to be done on the home becomes your financial responsibility. Some repairs are not as costly as others, but if you are buying a home you must factor in the need for repairs along the way.
- Repairs could be anything: roofing, electrical, plumbing, HVAC, leaks, floods, cosmetic repairs, repairs from natural disasters, etc. Quite often these expenses eat into a large portion of your housing budget.
- Taxes infiltrate most every aspect of our lives, and a home is no exception. As a homeowner, you will be responsible for paying property tax on your home which can fluctuate in a given year. These taxes tend to increase as the property itself gains value, but there are limits to the percentage of property tax that the government can charge you.
- You already have to pay insurance for your health, car, and other assets and now you will be responsible for paying homeowners insurance. Again these costs will fluctuate, but it is good to budget for them.
- Often, people put a lot of money into renovating or updating their home. These updates can come at quite a significant cost. When you are looking at a property, try to take into account the amount of updating you would want to do in the home and work that into the purchase price.
The price of a home does not stop at the purchase price. Instead of buying a home now with a small down payment, put off buying a home until you have at least 20% to put down on a reasonably priced home that’s well within your budget. It is crucial to know that your home budget is essential to making a good investment.
Too often on TV, we see these home improvement shows where a couple goes anywhere from $5,000 to $15,000 over their budget to accommodate their needs. It’s safte to increase your renovation expectations by 40% – both in cost and time spent. I cannot stress this enough: stay within your budget. You do not want to be financially crippled by your house.
A house is not always a home, and putting off owning a home until you are truly ready is one of the wisest financial moves you can make next year.