We are trying to answer the question: Should you be a Homebuyer or should continue to rent? The first Question we addressed is whether you are financially able to be a Homeowner. (Click here to see this discussion)
Now, we are going to discuss the Pros and Cons of Homeownership.
If you passed the first test, we know that, at least from a financial stand point, you qualify to be a homeowner. NOW, it is time to look at the reality of owning a home. It is up to you and how you weigh the Pros vs. the Cons of Homeownership
The benefits of homeownership
SOCIAL AND ENVIRONMENTAL BENEFITS
•· Freedom from noisy neighbors. In many cases, your own home provides you with more privacy than rental living. For some people this translates into a quieter living environment, for others it's the ability to have a garden or a garage for the car.
•· The ability to change your home as you like. Always wanted a yellow kitchen or a back porch? In your own home, you make whatever changes or improvements you like. This benefit gives you more control over your living environment, allowing you to make adjustments as your family changes or just as your personal taste dictates.
•· Parents who own their own home may be helping to boost their children's educational achievements, and even reduce behavioral problems, according to a nationwide study. The research showed that for children living in owned homes rather than rental units, math achievement scores are up to 9 percent higher, reading achievement is up to 7 percent higher and behavioral problems are 1 to 3 percent lower. One of the main reasons that children of homeowners did better was the differences in living environment. http://researchnews.osu.edu/archive/chldhome.htm
•· Living environment. Owning a home compared with renting leads to a 13 to 23 percent higher-quality home environment. Owners have more of an incentive to make improvements in their home, and create a more positive living environment. This results in the above benefits to their children by creating a better play area or learning area. All of these benefits for children of homeowners increase the longer they lived in owned homes. http://researchnews.osu.edu/archive/chldhome.htm
•· Homeownership builds confidence. Pride of ownership. Owners possess significantly higher levels of self-confidence than renters.
•· Homeowners are more involved in civic affairs, including voting in the last election and knowing their elected officials.
•· Homeownership builds wealth. The median net worth of most modest-income owners is almost $60,000 compared to less than $10,000 for renters in the same income group.
•· Homeownership provides tax benefits. The typical homeowner that pays a $1,000 house payment will realize tax savings of about $120 each month. http://www.uc.edu/cdc/niehoff_studio/programs/uptown/fall_06/articles/Benefits%20of%20Home%20ownership.pdf
•· Homeownership contributes toward lower crime rates. Homeowners have a greater financial stake than do renters. Therefore, homeowners have more reason to prevent crime by participating in crime prevention programs. The research also states that homeowners are less likely to become crime victims.
•· Homeownership lowers dependency on public assistance.
•· Homeownership and stable housing in a stable neighborhood brought down the rate of teenage pregnancy. http://www.financenavigate.com/Credit/Home_Ownership_Benefits_U_S__Society_244.html
- Stability- Renters move every 3 years on average. Remaining in one neighborhood encourages participation in community affairs and activities, you develop lasting friendships, and children benefit from educational continuity.
FINANCIAL BENEFITS TO HOMEOWNERSHIP
- Predictability- Unlike rent your mortgage payments don't go up over the years so your housing costs may actually decline as you own the home longer. However, Taxes & Insurance costs usually do rise. But, generally these same costs are passed on to the renter at each lease renewal.
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- Financial leverage -This is one of the only ways you can leverage of a low initial investment (down payment) to acquire a high value asset (Your Home).
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- Real Estate is a low risk investment. Though today and other periods of declining markets it is hard to believe this, but a home is a durable, marketable asset. It can be sold at a predictable price to a dependable group of available buyers as long as you allow enough time and exposure.
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- The marketability of your home is reinforced by the fact that financial institutions are almost always willing to loan a high percentage of the home's value.
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- The ability to use the Home's Equity is financially beneficial at every stage of your life including: paying off high interest debt, home improvement, college
expenses, medical expenses, starting a new business, and this goes all the way to being a source of retirement income.
Specific financial implications of home ownership.
- Appreciation
- Equity Creation and Forced Savings
- Tax Benefits
Appreciation
Although Las Cruces real estate moves in cycles, sometimes up, sometimes down, but over the years, Las Cruces real estate has consistently appreciated. This consistent appreciation makes your investment in your home a hedge against inflation. Now you need to consider some facts about this benefit.
First is the fact that in the very long term over a period of 20-30 years Real Estate appreciation rates are lower than many other investments (i.e. stocks other equity instruments). They are more equivalent to the rates of return on Government Bonds. But, there are periods of great appreciation which can be taken advantage of if one is fortunate enough to not being in a situation where they are forced to sell in a period of depressed prices. In addition, though other investments have a better long term rates of return they require an investment of cash and most people are not consistent in making this investment. Because your mortgage payment is a forced saving, and the leverage of a small one time investment in your down payment, you will almost always expect to own an asset that could be hundreds of times greater than your initial investment. The total amount of Homeownership equity in America is thousands of times greater than the total of all other sources of wealth for the great majority of Americans.
Equity Creation and Forced Savings - Your Mortgage payment that you are forced to pay each month is a savings account for you. Each month less of that payment is interest that goes to the bank and more is cash that is going into the savings account that we call equity in your home. Over time the savings portion begins to increase dramatically each month. Âs we discussed above this equity savings account is financially beneficial at every stage of your life including: paying off high interest debt, home improvement, college expenses, medical expenses, starting a new business, and this goes all the way to a source of retirement income.
THE TAX BENEFITS
Owning a home is one of the few times you get favorable treatment by the Internal Revenue Service.
1. The purchase
When buying your own home, most of the expenses are not tax deductible. But there is one exception that is worth finding.
The IRS says you can deduct interest in the year that it is paid, and that is usually part of each monthly loan payment. In addition, if the day you purchase is on any day other than the first of the month, you will likely pay a charge for "daily interest" between the day of closing and the end of the month. Look on line 901 of your HUD settlement statement. Much more importantly, the IRS says that, in most cases, loan discount points and origination fees are tax deductible to the buyer, regardless of who pays them. Look at lines 801 and 802 of your settlement statement.
2. Mortgage interest
You can deduct interest charged on a loan used to acquire or improve your principal residence in the year that it is paid. In the early years of a loan, most of your monthly payment is interest, so this can really add up. If you are in a 28% federal tax bracket, this can have the effect of lowering your borrowing costs by almost a third, depending on which state you live in. This is truly government a subsidy to home owners.
In addition, you can deduct interest on an additional $100,000 of mortgage debt, which can be used for any purpose. This is called the "Home Equity Loan" exception, and it allows you to tap into your home equity for any purpose. This gives home owners the ability to do what is called "debt-shifting." For example, if you live in an apartment and have a credit card balance of $10,000 at 18% interest, none of that interest would be deductible. But if you owned a home, and you obtained a home equity loan for $10,000 and paid off the credit card, then ALL of the interest expense becomes automatically deductible. Furthermore, the rate on the home equity loan is likely to be very much lower than credit card rates. This same technique works with any and all personal debt, from car loans to consolidation loans - with only one hitch. In every home equity loan, you have pledged your house as collateral for the loan. If you fail to pay the payments as agreed, you could lose your house to foreclosure. So be careful in using this technique.
3. The sale
This is the best financial benefit to homeownership.
•· If you have owned and occupied your principal residence for at least two of the past five years, you can earn up to $500,000 profit on the sale of the home for married tax payers, and$250,000 for single tax payers, and you will pay no federal income tax whatsoever.
•· And, you can do this as often as every two years for the rest of your life.
•· Most states recognize this federal exclusion, so you often get the benefit totally tax free. Unlike previous laws, you don't have to re-invest, and you don't have to be age 55.
The disadvantages of homeownership
and why owning your own home can be a challenge.
You have seen all of our reasons for owning your own home, but is a good thing for you. Here are some of the challenges you might run up against For more information, click on the source links provided after each segment:
•· Down Payment Although there used to be creative financing options available allowing you to buy a home with little or no money down, for most people who do not qualify for subsidized loans, Mortgage Companies now want a relatively substantial down payment.
•· Repairs and Maintenance You will be responsible for exterior repairs and maintenance and replacement over time of the windows, roofing, landscaping, etc. Inside your home there is the plumbing, painting, carpeting, and basic household items such as a refrigerator, range, washer/dryer, hot water heater, lawn mower and lawn implements, tools all of which not only need periodic repair but replacement over time.
http://www.gerberlife.com/gl/view/newsletter/july06/article1.jsp.
•· Property values can drop even if you work hard at maintaining your home be careful to choose a house and neighborhood that have strengthening values historically.
•· Being a homeowner is usually more costly than renting. Mortgage payments are generally higher than rent, and when doing your calculations, you must be careful to include the added costs of home repairs and maintenance. As we said above, as an owner, you must pay for any unexpected costs such as a new roof or heating system.
- Buying a home may cause a substantial strain on your finances. For the first several years, you should expect to pay more for housing as a homebuyer than as a renter. Consider the cost of furnishing, appliances, tools, renovations, property taxes, homeowner's insurance, utilities, and other upkeep costs and be sure to add these to your mortgage payment. It can be more than you would pay for rent.
http://www.first-time-home-buyer-center.net/advantages_disadvantages.htm
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A family budget and a savings strategy are important. If you run into financial trouble from illness or lose your job and fail to keep up with your mortgage payments, the mortgage lender could foreclose on the mortgage. This could result in the loss of your home as well as the equity you've built. A renter, on the other hand, can downsize to a cheaper apartment to cut expenses. Owning a home usually makes moving difficult and complicated.
Though we have covered these points by it is important to point out that there are certain myths about benefits of buying a home.
Boom and Bust -During the recent Las Cruces real estate boom, people were terrified about being priced out of the Las Cruces real estate market so there was pressure to BUY right then. Now we're seeing some of the fallout. Some home buyers used interest sensitive loans rather than conventional 30- year fixed rate Mortgages. They are now horrified by their ever-rising mortgage payments They can't afford the mortgage and foreclosures are at all time high.Sales and home prices are down and those that NEED to sell their homes will find that they have far less equity than they thought.
Don't buy a house when it's not something you want or need. It's a fact that homeownership is a great way for most people to build wealth over time. But that doesn't mean everyone should be a homeowner.
You should be aware of the following popular myths.
Myth #1. It's a good investment
In the 30 prior years, from 1969 to 1999, the average appreciation for homes exceeded the inflation rate by a little more than 1 percentage point. Compare that to stocks, which bested inflation by 7 percentage points in the same period. And appreciation isn't a given. There are cycles with periods in which homeowners had very low appreciation and some even faced declining prices.
Even when prices are perking along normally, though, your home may benefit your bottom line less than you think. Home-price appreciation figures don't take into account the considerable amounts homeowners shell out along the way. The Wall Street Journal once estimated a typical homeowner over 30 years would pay nearly four times the house's purchase price in maintenance, repairs and improvements. A home is primarily a place to live. Its value as an investment is secondary and certainly is no replacement for a well-diversified portfolio of stocks and bonds.
This is certainly true and if you have the ability to fund, and continue to fund, a savings program on a regular basis over the long term, and if you invest it wisely in equities, you will find this a better "investment" than homeownership. Unfortunately for most people this situation is not the case.
Myth #2. I'm tired of throwing away money on rent
The truth is being a homeowner is can very often be more costly than renting."
•· Be aware that you may be able to rent an affordable place in a good neighborhood instead of straining to buy a less desirable home.
•· We always see many people who have stretched themselves way too far to buy houses. There are many situations that can arise which will turn your life into chaos and what seemed like a reasonable cost of ownership into a disaster.
•· You're not really throwing money away when you send a check to your landlord, anyway. You're exchanging it for a place to live. When you are a renter, it's the landlord, not you, who is generally responsible for maintenance, repairs and the toilet that blows up in the middle of the night. If the neighborhood should start to slide, or you get or lose a job, you can up and move, often with just a few weeks' notice. It's true that you may have to deal with rising rents and recalcitrant landlords, but homeowners stuck with rising taxes and maintenance costs.
•· Moving is never fun, but moving when you own a home is an expensive, time-consuming process. Finding a buyer can take months and you should figure selling costs will eat up about 10% of your home's value, once you add agent commissions and moving expenses.
Myth # 3. I need the tax deduction
Buying a house just for the mortgage interest break would be like giving somebody a buck just to get 35 cents or less in return. That's because your write-off is limited to your tax bracket. If you're in the top federal tax bracket, every dollar you pay in mortgage interest only saves you 35 cents in taxes. Most people get even less, since they're in lower tax brackets.
Don't misunderstand - the tax break is nice, and you need somewhere to live. But you should make sure you can really afford to own a home before you take the plunge.
Remember that many of the real costs of owning a home aren't deductible. Uncle Sam won't give you a break for insurance, repairs or maintenance, and those costs can really add up.
Most homeowners should plan to spend at least 1% of their home's purchase price each year on maintenance and repairs, and sooner or later a big expense will come along - a new furnace or roof, for instance - that could consume a large amount of your savings. You can't ignore these expenses because, If you fail to maintain your home properly, you'll pay even more when it comes time to sell. Many buyers won't even bid on a property that shows significant neglect. Even in hot markets, buyers are likely to ask for expensive concessions to pay for the repairs you should have been doing all along.
We should not fail to mention the big, positive tax benefit that does come to the homeowner who sells and has considerable equity in their home from Mortgage Pay down, plus appreciation. $250,000 of that gain for single tax payers, and $500,000 for married taxpayers comes to you tax free and you do not have to buy another home.
Having now covered the Pros and Cons to homeowership,
The best advice on the issue of whether to buy remains the time-tested version: Do it when you have considered
both sides of the story and it is right for you.
Home ownership is best for you if you can agree with all the following statements:
- I plan to stay put for at least three years. If the Las Cruces real estate market in your area is weak, you may need even longer for price appreciation to offset the costs of selling and moving.
- I can swing all the costs involved. That requires, most importantly, having enough cash for a decent down payment, anticipated repairs and maintenance costs, and I qualify for a long term fixed-rate mortgage.
- I understand the disadvantages and costs of home ownership and still want to be a Homeowner. Then it is right for you. So happy house hunting.
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