By Patricia Jones, Alliance Community Task Force: Creating Opportunity
Home ownership is part of the American dream. Our politicians are talking about it - at the federal, state, and local levels. Buying a house is often the largest investment a family can make. Is it the right choice for everyone? There are advantages and disadvantages in owning a house.
The biggest reason people want to buy a house is emotional; it is a major part of the American dream. Ownership gives a sense of privacy, freedom, and stability. You have space from your neighbors. You can decorate to suit your tastes. You can add on. There is probably a yard for kids to play in, or where you can grow things. Neighbors become friends.
Stability is the major reason why home ownership is encouraged. When people buy a house, they plan to stay in that place for several years. This means a greater commitment to their employer, their community, their school.
Another major reason to buy a house is financial. Houses almost always go up in value if they have been maintained. As you put money toward mortgage payments and pay down your home, you slowly build equity, or the amount of your house that you own. Realize that initial home payments are applied mostly to interest. It takes a long time to build equity unless you make a large down payment or pay additional money on your mortgage every month. When that equity is large enough, people can borrow money more easily and get home equity loans for lower interest rates.
There are tax benefits, too. Mortgage interest can be deducted from your federal income tax return, and so can much of closing costs and property taxes. Nebraska allows us to deduct part of our property taxes. Many people qualify for the Homestead Exemption as well. People over 65, veterans, and disabled receive property tax relief if they meet income and home value guidelines.
What are the downsides to buying a house? Financial costs, maintenance, and loss of mobility.
It takes a lot of money to invest in your first house. Most financial institutions want 20% down. On a $200,000 house, that is $40,000. It's hard to come up with that kind of money; family members might gift it, there might be an inheritance, or you might qualify for a special government program like VA, FHA, or USDA loans. Banks will charge closing costs on a mortgage. These can run from 2%-5% of the purchase price, including numerous fees, property taxes, mortgage insurance, home inspection, first-year homeowner’s insurance premium, title search, title insurance, and points, prepaid interest on the mortgage. It can take about five years to recover those costs.
There are regular maintenance requirements for homeowners. Siding and rooms must be painted. Floors may need to be refinished or carpeted. Plumbing, HVAC, and electrical issues arise. The roof might leak. Appliances wear out. Lawns need to be mowed and trees need to be trimmed. Some of these chores are ones homeowners can do, but some require hiring professionals.
What happens if/when you decide to move? Maybe you have a job offer in another community. Can you afford to pack everything and move? What does the housing market look like - both here and there? Will you be able to sell your current home quickly enough that you have the equity to invest in a home in the new community? Remember that it takes several years to build equity in a house. Is there a demand for your home in the current housing market so that it will sell quickly at a good price? Will you be able to make a down payment on another house if yours isn't selling?
Like any investment, the value of a home usually increases, but it might decrease. We saw a major collapse of the housing market in 2008, largely due to unethical banking practices. Other forces beyond a homeowner's control, like climate change or industries closing, affect housing prices.
Even though houses are usually a sound investment, home ownership is not for everyone. Think carefully before making that major commitment.