The other day I was at PetSmart buying dog food and toys for my furry children and I had a conversation with one of the workers. She asked what I did for a living, and when I told her, she said, “Oh, I’d love to buy a house but it is too expensive.” This is a refrain that I hear a lot. In fact, it is the most common objection I hear to someone trying to buy a house.
Is buying and owning a house expensive? Yes, it can be. To buy a house you may need a down payment, earnest money, you will need to hire a home inspector, and at closing you could have closing costs and the appraisal. Once you’ve bought the house you will have to pay the utilities, mortgage, insurance, and taxes. Finally, you will be solely responsible for maintaining your house. That means that you have to fix the plumbing, water heater, garage door, replace the siding, and anything else that needs fixing.
The better question is not whether home ownership is expensive but whether the benefits are worth the costs. Today I’m going to focus strictly on the financial aspects but I will be writing a more detailed piece on the non-monetary benefits of home ownership soon. The question I want to examine is, “Is it financially worth it to buy a house instead of renting?”
You’ve probably heard that buying a house is an investment. It is and it isn’t. Your primary residence is never going to net you a 12% annual return but it can turn a profit – while renting never will. There are three ways in which owning is a better financial decision than renting.
- AS THE HOME’S VALUE APPRECIATES, YOU ARE MAKING MONEY. Traditionally, houses increased in value at about 2.5% per year. That is a very general statistic and caution needs to be taken in treating it as gospel. That said, historically speaking, a house that cost $100,000 in 1986 is likely to be worth between $150,000 and $200,000 today. Even if the actual growth is significantly smaller, it is still better than renting. When you rent, any gain in value belongs to your landlord and you get nothing.
- YOUR MORTGAGE PAYMENT IS BUYING AN ASSET FOR YOU, NOT YOUR LANDLORD. For a long time, I focused on the interest I was paying each month when I made my mortgage payment because I HATE being in debt. It took me a while to really look at the other number in the balance sheet my bank sends me, the principal. As I was making payments the principal, or the amount that I owed kept going down. That meant that I was gaining equity or ownership of my home. That amount of equity grows slowly at the beginning of your loan but increases pretty dramatically as time goes on. In the first year of a $200,000 loan you may only gain $1,500 in equity but that is $1,500 more that you own of your home. When you rent you gain no ownership in your home, ever.
- THERE ARE SIGNIFICANT TAX BENEFITS TO HOME OWNERSHIP. Finally, the government likes to encourage people to own their homes so they allow people to deduct the interest they pay on their home (see a tax professional for the details because I never pretend to be an accountant). Depending on your tax bracket this can be a significant benefit to you.
For those that would like to buy a home but feel that they can’t afford it, I would encourage you to talk with a lender. Most lenders will happily go over your finances and give you a real picture of where you stand. They will connect you with programs such as First Time Home Buyers, VA, FHA, or Bond Programs that will be able to assist you in getting the home you want. They will also coach you on how to get your financial house in order so that you are in the best position possible to buy the home of your dreams.
If this is a step that you are considering, then please reach out to Tina or me and we will connect you with a lender that has done wonders for our clients. I will continue this discussion here by looking at the break-even point for home ownership.