Is buying a house a good investment? The short answer is usually yes – but only if you’ve considered all the potential financial rewards and risks associated with homeownership.
While buying a home can be incredibly rewarding when done right, it’s crucial to understand that the profitability of a home purchase will depend on many factors, including the state of the housing market and your financial situation.
To help you make a well-informed choice, we’ve broken down the financial implications of a home purchase.
Financial Benefits of Buying a Home
When it comes to investments, especially real estate investments, value is king – and a home can be an incredibly valuable asset.
Not only do housing prices tend to appreciate over time, but owning a home also provides several financial benefits that can help you enjoy the full value of your purchase.
Here are some of the most important benefits to consider:
Home values tend to increase over time
Homes aren’t like cars or other big-ticket items that depreciate over time. Most single-family homes appreciate in value, meaning the resale price of a house will typically be higher than the original purchase price.
By making regular improvements to the property, such as adding a new deck or remodeling the kitchen, you can increase the value of your home even more.
And as the value of your home appreciates, so does your net worth and equity, giving you access to greater financial security and other financing options that come with homeownership.
Payments go toward equity
You could pay rent for years and never actually own anything. But when you make a mortgage payment every month, some of that money goes toward your home equity.
Equity is the difference between what you owe on your mortgage and the home’s value. So as your payments reduce your debt, your equity in the property increases.
This can be very useful in times of need, like if you need to pay for a home renovation or medical emergency. You can access this equity by refinancing your mortgage or taking out a home equity loan.
More financial flexibility
Equity gives you a lot of financial flexibility through various loan types and refinancing options – which you can only get as a homeowner.
Typically, owning a home opens you up to financing options like a home equity line of credit (HELOC) or home equity loan – both of which allow you to access your equity for cash.
These loans can be used for a variety of purposes, such as home renovations, college tuition or just to help you get through a rough financial patch.
You can also tap into your home’s equity when refinancing your mortgage, allowing you to take cash out of your home. With this, you can qualify for a better mortgage and interest rates in the future, saving you even more money.
As long as you’re paying a mortgage, the interest you pay on your loan is usually tax-deductible as long as you itemize your tax deductions. This means you can deduct it from your taxes and potentially save thousands of dollars per year.
The 2017 Tax Cuts and Job Act reduced the maximum of debt that qualifies for the mortgage interest deduction from $1 million to $750,000.
If you itemize your deductions, you can also deduct the property taxes you pay on your home, as well as any state/local income taxes. This deduction is capped at $10,000 per year, so keeping track of your total property tax payments.
Finally, if you sell your house and make a profit, the federal government will allow up to $250,000 – or $500,000 for couples filing jointly – in capital gains tax exemption. But that’s only if you’ve lived in the home for at least 2 of the 5 years before selling it.
Financial Risks of Buying a Home
While there are many financial benefits to homeownership, it’s crucial for potential buyers to also understand the risks associated with buying and owning a home. Before you take the plunge, be sure you’re aware of the following:
Buying a home is an expensive process. In addition to the cost of the house itself (part of which you’ll need up front as a down payment), you’ll also need to pay closing costs. These include everything from loan origination fees, title insurance and appraisal fees to home inspections and other fees.
Keep in mind that these costs typically range from 3% to 6% of the purchase price. So you’ll want to make sure you have enough money saved to cover them before committing.
While your monthly mortgage payments might be lower or equal to what you’d pay in rent, the down payment and closing costs can be a significant upfront expense. So be sure to factor in these extra costs when comparing renting versus owning.
Cost of home maintenance
Owning a house means you’re responsible for any repairs and maintenance of the property. Getting a home inspection before the purchase may give you a glimpse at potential future issues. But most of the time, repairs can appear quite unexpectedly.
From fixing plumbing issues and replacing appliances to fixing a leaky roof, many potential issues can quickly add up to hundreds – if not thousands – of dollars in unexpected expenses.
If these issues aren’t discovered during the home inspection, you may be responsible for paying for them. But with homeowners insurance, you may be able to cover some of the expenses related to these unexpected repairs.
Home insurance rates vary depending on the location of your home and other factors like how big it is and when it was built.
Risk of home value dropping
The value of your home isn’t guaranteed to increase over time. In fact, it can decrease significantly depending on a variety of factors.
A decrease in demand for homes in your area, natural disasters and economic downturns are all scenarios that can lead to depreciation – a situation in which the market value of your home is lower than what you paid for it.
This can have a devastating effect on your financial security, as you may end up owing more than what your home is worth or struggling to sell at a reasonable price.
One of the best ways to protect yourself from this risk is to do your research and make sure you’re buying a home in an area with good infrastructure, low crime rates and high demand.
This can help you ensure that your home retains its value over time and increase the likelihood of a good return on investment when you decide to sell.
Ultimately, when buying a home, be sure to factor in additional costs – like closing fees, home maintenance, insurance and all the possible risks involved.
Ensuring a Good Investment
All in all, buying a house is a great way to invest your money – but only if you do it the smart way. It’s important to consider all of the potential costs associated with homeownership, including closing fees, maintenance and insurance.Finally, use a mortgage calculator to understand the different loan terms available and how much you can afford. With all this in mind, you can get a better idea of whether buying a house is the right move for you and your financial goals.