Buying a home is the biggest financial decision many people make. As with any major decision, a key question to answer before proceeding: Why?
Perhaps your why is a larger home to raise children, have a yard, move into a better school district or get your new home office for remote work. There is no right or wrong answer, merely the best one that fits each individual circumstance.
“There is an emotional side to home ownership, particularly in the United States – it’s often baked into people’s vision of the future or part of the American dream,” said Tom Figgatt, president of Portolan Financial in New Orleans. “And it does feel good to own your own house; you can feel like it is a home and not just a temporary dwelling.”
The benefits of home ownership come with costs and limitations. For some, renting may be a better option. Consider the pros and cons of buying a house as you think through the process and before you make a decision. You can also read our homeownership guide to help you through your process.
The average sales price of a house in the United States hit a high mark in 2022 ($547,800), according to the Federal Reserve Bank of St. Louis, which tracks housing costs. The market was a boon for sellers, but rising interest rates slowed demand and lowered prices. Anyone who wants to buy a home will find lower prices but also higher borrowing costs.
Before you make the major financial investment of buying a house, make sure you’re the type of person that is right for ownership. Are you someone who likes to take care of the yard and can provide some do-it-yourself maintenance? Do you relish the idea of re-shaping a house to your idea of an ideal home?
Or are you someone who likes the idea of someone else (a landlord) paying for any upgrades and being responsible for any major expenses, such as paying for a new roof, upgrading the plumbing and putting in new floors?
Here is a summary of pros and cons to consider as you ponder buying a house.
Pros & Cons of Owning a House
| Pros | Cons |
|---|---|
| Stability and peace of mind | Must pay annual property taxes and homeowners’ insurance (if you have a mortgage) |
| Can usually generate equity (money) long-term | Comes with regular maintenance costs (for painting, mowing, edging, tree-trimming, plumbing, roof repairs, etc.) |
| Can control monthly payments with a fixed mortgage | Maintenance can be more expensive if homeowner is not handy with DIY chores |
| Can leverage ownership into increased borrowing power | Can be difficult and expensive to move if you don’t like your neighbors |
| Can make decisions about future home and yard development (additional rooms, a shed, a pool, etc.) | Can’t control monthly dues for Homeowners Associations (HOAs) |
Historically, the biggest advantage of owning a home is long-term financial security. For decades, home ownership in America represented stability because the housing market almost always went up in value, rewarding homeowners with equity and also a way to borrow money, should the need arise.
But there are intrinsic advantages as well, such as control. If your family grows, you have the power to add a bedroom or bathroom to your house. Or expand the kitchen. Or widen your driveway to accommodate more cars as your family grows. There are also tax benefits and other financial benefits to home ownership.
According to the Federal Reserve Bank of St. Louis, the average U.S. home price grew a staggering 80% from 2012 to 2022. For many homeowners who opted to sell during the past decade, the market growth provided remarkable equity. History shows a constant fluctuation of overall home prices and even periods of decline or flatness. Homes can lose value, but it doesn’t happen often. Long-term, housing is an investment sector that rarely disappoints.
No longer are interest rates at rock bottom. In a move to stave off inflation, the Federal Reserve consistently hiked the prime interest rate to nearly 8%, a level not seen since 2007. But it’s a long way from the highs of the 1980s (12-13%). Besides, rates for borrowers vary depending on credit score and where you are buying.
Your equity is the difference between what you can sell the home for and what you owe. Equity grows as you pay down your mortgage. Over time, more of what you pay each month goes to the balance on the loan rather than the interest, building more equity.
Mortgage interest is deductible on the first $750,000 of the purchase price of the home, as is interest on home equity loans, property taxes up to $10,000 if married ($5,000 if married filing separately) and some closing costs at purchase time. However, the increase in the standard deduction to $27,700 for married couples ($13.850 if single) makes it a little tougher to itemize those interest deductions. Calculating all these numbers prior to purchase will help show what tax benefits you can gain.
You own the property, which means you can renovate it to your liking, a benefit that renters don’t enjoy.
The work-at-home phenomenon may not vanish after the pandemic fades, which means more of us will need a home office. The right setup makes a difference in comfort and productivity. Those needing that work-at-home space can find it on the market – if they act quickly.
A fixed-rate mortgage means you’ll pay the same monthly amount for principal and interest until the mortgage is paid off. Rents can increase at every annual lease renewal. Fluctuating property taxes or homeowner’s insurance can change monthly payments, but that typically doesn’t happen as often as rent increases.
People tend to stay longer in a home they buy, if only because buying, selling and moving is difficult. Buying a home requires confidence that you plan to stay there for several years.
The disadvantages of owning a home mostly fall into the category of permanence, with a dash of financial uncertainty. Buying a new house costs money, and a lot of that money comes out of your pocket at the time of the purchase. Later, there are no guarantees that home prices will rise. And without a large down payment, it can take years for your home equity to accumulate.
Besides money, owning a home can be an anchor. If the housing market is down, you might not be able to sell or move when you want — or at the price you desire. If you are just starting out in your career and you’re not certain you live in a place where you want to be for a long time, home ownership can be an obstacle to finding a new job elsewhere.
Let’s look at some specifics.
Closing costs on a mortgage 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, which are prepaid interest on the mortgage. It can take about five years to recover those costs.
If one of the advantages of homeownership is stability, that means it may take more thought to accept an attractive job offer requiring you to pick up and move to another city. The offset to this concern is the speed with which homes are selling.
Contorting yourself to fit under the kitchen sink to fix a leak is a joy (not) for those who try it the first time. But when you own a home, you are the first line of repair – especially if you want to save money by doing it yourself, Bob Vila style. Some items do need professional attention. If the air conditioner goes out, you’re not only going to sweat until it’s fixed, you’ll also be writing a check to get the cool air flowing again. Some folks enjoy mowing the lawn; others don’t. That, and putting a new coat of paint on the house, trimming the bushes, cleaning the gutters, and shoveling the snow are all part of home ownership.
Most of the payments go toward interest in the early years of a mortgage, so you don’t gain equity quickly unless property values in your area skyrocket – and that has happened in many areas in the post-pandemic market. Those who want to build equity faster could apply a small extra amount to their principal each month, provided it fits the budget. Even $20-to-$50 extra every month specifically applied to the loan principal can help.
That happened during the 2008 nationwide housing crisis, and more local conditions can cause this, too. Your building will depreciate over time, especially if you don’t maintain it.
As you try to sell your home, you still have to keep making mortgage payments and maintain it. If you’ve bought another house before selling yours, that means paying for two homes. The post-COVID sales fervor did help sellers unload their property faster, though.
Home ownership isn’t for everybody, at least not in every stage of life. Before you buy, consider whether it’s right for you now.
Another option is to seek a rent-to-own situation in which you sign a rental agreement for a short period (12, 18 or 24 months) with an option to purchase the property at the conclusion of the lease. In some cases, in exchange for a decision to buy, landlords will agree to apply some of your previous rent payments toward a down payment on the home or give you immediate equity.
Regardless, just as there are pros and cons of home ownership, there are also plusses and minuses of renting.
In assessing the pros and cons, Figgatt suggests asking yourself three questions.
“The down payment, closing costs and risk of sudden, very large expenses popping up combine to make it a very expensive proposition,” he said. “You need to save above and beyond your mortgage payment for infrequent yet major household expenses so that you keep it up properly. And making a smaller down payment and paying private mortgage insurance (which protects a lender in case you default on your mortgage) only increases the total cost of ownership.”
“It can be difficult to break even on a house if you stay in it for three years or less; the closing costs and commissions are significant, and expecting the house to appreciate in value enough within three years to make up for those costs may be setting your expectations too high,” Figgatt said. “And remember that your entire mortgage payment does not go towards the home’s equity. During the first year of your mortgage, depending on the terms, perhaps only about 30% of the payments will actually go towards the principal of the home.”
“If you’re looking at the purchase as an investment, it could work out very well, but high fixed costs mean the shorter the amount of time you hold the property for, the less likely you are to come out ahead relative to other investment opportunities out there,” he said. “Constantly buying and selling houses if you move frequently may be eating up wealth, not increasing it. And if you plan to rent the place out after you move, make sure you have a plan for managing the property – be ready to pay for that, too.”
Big financial decisions can be scary, and you don’t want to be paralyzed into inaction. InCharge Debt Solutions can help you think through the variables so you can decide if this is a smart decision right now.
If credit issues stand in your way, InCharge can help you become a better candidate for a mortgage and save money on your payments. Take the first step by looking into getting credit card debt relief to free up your finances for a home purchase.
A mortgage calculator can help sort through costs and budgets to figure out how much house you can afford. If you’re a renter, check out the rent or buy calculator for similar budgeting calculations.
Online homebuyer education courses can also be a stepping stone for those looking into homeownership. You’ll learn how to prepare for owning a home and get a better understanding of the home purchase process, including how to finance and afford a home for the long term.
For many people, owning a home is a cornerstone to a life-long financial puzzle. It’s a major life purchase because of the large amount of money needed for the investment.
But buying a house, as with buying a vehicle, investing in a 401(k) and putting money into a college fund, deserves thoughtful consideration before action. It also can require a clean bill of financial health, which requires minimal debt and solid credit.
If you have too much debt to qualify for a home purchase, consider talking to a qualified credit counselor about how to shrink your obligations to make homeownership a reality. A credit counselor can present options to get you to financial freedom — and into a new home.