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.
Things to Consider Before Owning a House
1. Interest Rates.
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 of 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 home 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.
There is also the possibility of a collapsed sewer pipe, water leaks or other such problems that can lead to repairs that will cost thousands of dollars.
Such costs do not show up in the monthly payment, but they are very real hits to a family’s budget.
Read also: Buying a House in Your 20s: How to Do It Without Going Broke
3. Insurance and Taxes.
In addition to the cost of principle 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.
Read also: 5 Practical Tips for First-Time Landlords
4. Tax Benefits.
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.
5. 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 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.
What You Need to Know About Second Mortgages
If you aren’t familiar with second mortgages, these loans allow you to borrow against the value of your home.
Consider your home as an asset. Not only is it an asset, but it is an asset that gains value over time.
If you have any projects that you’re looking forward to, then you may consider taking out a second mortgage to fund your projects and goals.
Basics of a Second Mortgage
Second mortgages utilize the equity in your home. This means that you compare the market value of your home to the loan balance.
Equity may increase or decrease, but typically, you will see your equity grow over time.
When you make monthly payments on your loan, you increase your equity. If the real estate market is strong or if you make improvements to your home, it will gain value and increase your equity.
Second mortgages may come in one of two forms.
First, you can receive a lump sum of money. You can use this one-time loan for whatever you want. You can gradually repay that loan over time and receive fixed monthly payments.
The other way is to receive a line of credit. This gives you a pool of money that you are allowed to borrow from.
A second mortgage allows you to borrow a large sum of money.
Since houses are worth a lot of money, you may be qualified for large amounts. In fact, usually, you can borrow up to 80% of the value of your home.
Likewise, the loan will generally have a lower interest rate than other types of loans. You may even be able to take advantage of tax benefits.
Uses for Second Mortgages
People decide to go for second mortgages for a variety of reasons. Often, it’s to help with projects or financial issues.
Here are some of those reasons:
- Home improvements
- Debt consolidation
If you own your own home and need a large sum of money, using a second mortgage can be your way to real money in your pocket.
Second mortgages have a lot of benefits. When you own a home, your house will usually increase in value over time.
This is particularly true if you do any home improvements. As you pay on your loan, you will continue to grow in equity.
With a second mortgage, you can take advantage of a lump sum of money, lower interest rates and other benefits.
Owning a home can, unfortunately, lead to a lack of flexibility.
It can take some time to sell a home. 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.
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.