Do You Know The RISKS & REWARDS of Buying a Home?

 

We all know that every financial decision has its rewards and its risks. The purchase of a home is no different. The wise course to take in these decisions is to weigh the rewards against the risks. Naturally, you want to maximize the advantages and minimize the disadvantages.

So, how do you do that? It calls for objectivity on your part!

Normally, you’d have to do some research to find out the risks and rewards of home buying. But I’ve already done that for you below! Read on to see if you're a good candidate for owning a home!

Rewards

Everybody receives an "intangible" benefit when they buy a property - the joy of owning it and creating a home for your family. But, there are also several objective financial rewards that can be earned through home ownership! 

First, there’s appreciation. On a long-term historical basis, your home is generally worth more when you sell it than when you bought it. A home purchase is a wonderful financial investment over time.

A second benefit: Financial flexibility! This benefit is a result of appreciation. Here’s how it works: When your home appreciates, this means you can sell it at a higher price. Then, you can use the profit to buy a bigger and better home…tap into the equity (what your home would sell for minus what you owe on the mortgage)…pay college tuition for the kids…use it to fund your retirement…or any other goals you have in mind!

The third benefit: leverage. Buying a home allows you to use borrowed money (the mortgage) to profit on later price increases (appreciation) on property you haven't paid for.

The fourth benefit: tax breaks! You can deduct property taxes and mortgage interest and keep up to $500,000 of capital gains!

After reviewing those rewards, you can see that home ownership is nothing less than a wise investment in your future!

Risks

It’s no secret that every financial decision has its risks as well as rewards. This means you need to know what those risks are right from the start.

With this knowledge, you can anticipate those risks and make a decision on how you want to deal with them. So, I recommend that you review the following risks to make sure you want to assume the responsibility of home ownership.

Risk 1: A decline in value. 

Unfortunately, we saw this risk raise its ugly head in the recent "mortgage meltdown." From 2006-2009, the value of homes declined.

To be honest, this seldom happens on a historical basis (and prices are on the rebound). However, it still tells you there's no absolute guarantee that home values will appreciate.

If that makes you a little nervous, consider this fact: Over the long-term, home prices do tend to appreciate. Also, home ownership is a heckuva lot less risky than the stock market!

Risk 2: Maintenance expenses. 

It takes money to maintain a home - roofing, heating, cooling, siding, paint, etc. This fact means that you must have the money to pay for routine maintenance costs as well as the inevitable big-ticket items (water heaters, furnaces, etc.) that come with long-term home ownership.

Risk 3: Loss of other investment opportunities.  

In the short-term, alternative investments (stocks, bonds, etc.) may give you a greater return in less time if their value rises faster than that of the homes in your neighborhood.

In such an event, you might do better as a renter or investor. However, keep in mind that, as I stated above, this is a short-term strategy.

Risk 4: Lack of flexibility. 

A home purchase ties you down to a specific neighborhood and city. Now, this is a benefit to many home buyers because it allows them to settle down in a community. But, if you're a person who prefers the freedom to “roam," then home ownership may not be a good choice for you.

Here’s what I mean: home ownership doesn't make it easy for you to take a new job elsewhere or move on to a different location. Plus, if you have to put the home on the market in a hurry due to a divorce, job loss, etc., then you can take a heavy financial hit.

Risk 5: Fewer financial options. 

If you have a large mortgage payment, it can make it hard to invest money elsewhere (savings, investments, vacations, etc.).

Okay, I hope this list of the rewards and risks of home ownership has helped you reach an objective decision on home buying. If you'd like further help in analyzing how these factors apply to your specific situation, contact me sclark@deebrealestate.com or 402.305.4335.