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One of the biggest components of the traditional American Dream is owning a home. Millions of Americans have taken the plunge over the previous decades to buy a home of their own. A home can help you build wealth over time, but is it the most sensible move from a financial standpoint?
Homeowners In The US
Nearly 63 percent of American households owned a home as of 2015. This left 37 percent of Americans renting. In many instances it is actually cheaper to own a home than to rent. However, there are some variables that can come into play when deciding whether owning a house makes sense.
Before deciding whether to buy or rent, the current interest rates are definitely a statistic that you’ll want to take into account. The higher the interest rate, the more a borrower is likely to have to pay over time. Of course, those who pay off their mortgages and own their homes free and clear will not have to worry about interest, which will free up more monthly cash flow for other expenses.
Another consideration over the monthly cost of owning a home that people will want to take into account is the cost of home maintenance. It will be necessary to replace HVAC systems and roofs occasionally, regardless of how well these are maintained. Additionally, a new coat of paint will provide a nice improvement whether it covers the interior or the exterior. These costs are in addition to the actual principle and interest costs that are required to avoid foreclosure. Additionally, there is the possibility of a collapsed sewer pipe, water leaks or other such problems that can lead to repairs that will cost thousands of dollars. These are costs that do not show up in the monthly payment, but they are very real hits to a family’s budget.
Insurance And Taxes
In addition to the cost of principal and interest, homeowners will have to pay for insurance and property taxes. Those who owe money to a bank for a home are generally required to carry an insurance policy to protect the bank or credit union that extended the loan. This insurance also protects the homeowner should a home endure major damage. Also, most areas of the country have property taxes that add to the cost that a homeowner will pay. While homeowners will generally see these costs on their monthly statements, they also exist for those who rent. The cost of insurance, property taxes and interest are hidden in the cost of renting, along with the estimated cost of maintenance and a bit of profit for the landlord. This is why renting can often cost more than buying.
Those who own a house may be able to save money on their taxes. Mortgage interest and property taxes are deductible expenses that cut down taxable income for homeowners. For those who have enough deductions to itemize their tax returns, owning a house can cut the amount that homeowners have to pay to the IRS. Those who rent do not have access to these deductions as they will instead go to their landlords. This is another point to take into consideration when it comes to deciding whether to buy a home or rent.
A Forced Savings Account
If you’re looking to build wealth, a home in a desirable area can help you get there. People who put enough money down instantly have some equity that they would theoretically be able to access should they need it. Every monthly payment then adds to the amount of equity that the homeowner holds. When the house is completely paid off, there is no need to pay for rent or a mortgage, although taxes and insurance costs will probably continue.
Should a homeowner decide to sell a home, the equity would then be cash that they would have access to. Additionally, those who reach senior citizenship can access the equity that they they have in the home through a reverse mortgage. Homeowners who qualify for a reverse mortgage can continue to live in their homes while accessing cash from a bank. The home just goes over to the bank after they pass away if the loan is not repaid by any heirs.
Flexibility, Or Lack Thereof
Owning a home can unfortunately lead to a lack of flexibility. It can take some time to sell a home, and if it’s not paid off, a borrower could wind up paying for two homes if they have to move quickly for a new job. Additionally, home values can rise and fall, which can lead to a borrower owing more than they could get for selling a house. On the other hand, a house that’s paid off would allow for some free and clear rental income should the owner decide to move. Those who rent can basically move at any time with few restrictions.
There are many considerations that should go into whether owning a home is the right decision. Those who have a nice down payment will have some instant equity, and the savings account that their home constitutes can grow over time. If the value of the home increases, the size of this forced savings account will follow suit. Owning a home can make sense financially, but there can be circumstances that can make this less of a sure thing than many might expect.