Homeownership can feel like an exciting milestone, a logistical headache, and often both at once.
The roof over your head is often one of the bigger line items on your budget, so changing homes involves a financial overhaul in addition to the physical load of moving all of your stuff. The best way to make the move as smooth as possible is to go in with open eyes. That means understanding the true cost of homeownership, both risks and benefits, even before you close on your new home.
What Does Homeownership Mean?
For many people, homeownership is a major part of the American Dream. Becoming a homeowner can feel like an important symbol of success as an adult. The cost of owning a home is also likely to be one of the largest purchases of your life. For both financial and emotional reasons, it’s smart not to take this decision lightly.
Closing on a home means assuming the risks and benefits that come with owning the property. In most cases, the home you buy will be yours for at least the next several years, if not decades. Choosing a home means committing to a major financial agreement and a specific community — in short, it’s an investment in a particular path for your family.
What Are the Benefits of Homeownership?
Owning your home comes with various financial and emotional advantages. These are a few of the top benefits that make homeownership an appealing prospect.
The top reason to buy versus rent is that you want to own a house! While some lifelong renters may value the freedom of being able to cut ties and move easily whenever they want, homeowners see value in having a property in their name.
As soon as you start paying off your mortgage, you’re building equity, increasing the share of the property that belongs to you. Through home equity, a home has value not only as a simple roof over your head, but as part of your net worth. As the housing market changes, your home equity has the potential to rise in value.
Control over your home
Renters may have to get approval from their landlord even for something as simple as a fresh coat of paint. As a homeowner, you make the call about designing renovations and updates. Want a deck, a pool, an open-concept home makeover? As long as your budget and any applicable county permits are in order, you’re good to go.
If you have a fixed mortgage, your payments stay the same throughout the duration of the loan. This can make your budget easier to plan, because you’re not waiting each year to hear from the leasing office about any increases. If your income increases over the course of your career, a steady mortgage payment lets you put that extra money toward other plans you’d like to pursue. Not to mention that ultimately, payments stop altogether and you own your home free and clear, which means you can put the mortgage part of your budget toward other plans.
Is a home an investment? Yes and no. You rely on your home for shelter, so it’s not quite the same as something like a stock market investment that you could sell at any time without rearranging your daily life. But a home is similar to an investment in that it’s a valuable asset that tends to grow in value over time.
Your housing market affects how much you can expect your home to appreciate. Generally, though, the average home in the United States appreciates around 3-5% annually.
Additional financing options
Whether you own or rent, you probably devote a substantial chunk of your monthly income to keeping a roof over your head. If you’re building home equity, you might be able to put a portion of those payments to work for you if needed. Some loans and other financing options help homeowners borrow against the equity they’ve saved, including Noah’s home equity sharing program.
What Are the Disadvantages of Homeownership?
Homeownership isn’t without its downsides. These are a few disadvantages to consider before taking the plunge.
The cost of owning a home is significant, in more ways than one. Even the “average” home is roughly $300,000, not to mention the mortgage interest that adds to the sale price. Most mortgages are a 15 or 30-year commitment. That means you’re not only committing to the loan balance and to a particular house, flaws and all. You’re also committing to a substantial amount of time in a particular community. Check your commute, schools, entertainment, and even typical climate throughout the year so you’re not stuck somewhere that makes you unhappy.
Mortgage payments can also cost more than rent, depending on your area and the kind of home you buy compared to where you lived before. It’s important to discuss plans with financial professionals you trust so you feel confident about your new budget before closing on a home. If it turns out you overestimated the mortgage you can comfortably pay, you’re in a difficult position. You may be house-rich but cash-poor, devoting too much of your paycheck to your home and sacrificing on other wishes. In a worst-case scenario, you could default on payments and ultimately risk foreclosure. Taking out additional home loans, such as home equity loans, can contribute to this problem.
Finally, routine maintenance is an ongoing expense that homeowners face and most renters do not. The rule of thumb is that you can expect to spend around 1-4% of your home’s value on repairs and maintenance each year, not counting any improvements or renovations you do.
Why Is it Better to Own Than Rent?
Experts disagree over whether owning or renting a home is cheaper in the long run. You build equity and you may make a profit by selling your home at the right point in your housing market. You’re also responsible for paying for all maintenance, mortgage interest, and various costs from trash pickup to property taxes that renters don’t pay.
You may be able to run estimates with a financial advisor’s assistance and determine that you’re likely to come out financially ahead by owning your home. Buying a home in a desirable area can be a strong long-term asset that you can enjoy and even pass down within your family. Even if financial predictions aren’t clear, you may decide it’s better for your family to own property that you can manage according to your wishes, not a landlord’s.
Is it Better to Buy or Rent This Year?
The pressing question in almost any discussion lately is, “How does this advice apply to life in 2020?” Pandemic response has affected how you work, when (and whether) you send your kids to school, how you socialize, and more. It stands to reason that choices about your home are affected, too.
The housing market tends to change even in typical times. A $200,000 home can devalue to $150,000 or increase to $300,000 in a fairly short time frame, depending on the market. If your local housing market devalues, it might be a good time to think about buying, since you may accrue equity more quickly if values go up after you make the purchase. If there’s high demand for rental homes, you may see rent increases.
The housing market in your area is one determinant of whether the cost of homeownership is worth it in 2020. The other factor is your own financial stability. Think about how your job is affected by the pandemic. If you have any concerns about job stability, it may make sense to keep savings for an emergency, rather than a down payment. If your finances are in great shape, your job feels stable, and your housing market favors buyers, you may be in an ideal position to buy a home.
Freedom of Owning a Home
Owning a home involves a high degree of responsibility. What makes homeownership so attractive is that it comes with a lot of freedom, too. Owning property gives you full license to personalize your living space. You also retain control over a portion of the money you put into home payments, in the form of home equity.
Building equity puts you in a position over time to access this value through loans, HELOCs, or home equity sharing with a company like Noah. With Noah, you could use a portion of your equity to make your next home improvement dream a reality, without adding monthly payments to your budget.
The cost of owning a home makes homeownership one of the biggest financial decisions you’ll probably make. For many families, the rewards are well worth it.