The Ultimate Pros And Cons List Of Buying A House
Patrick Chism6-minute read
November 19, 2020
There are plenty of advantages to owning your own house. If the idea of homeownership is becoming more appealing to you, it’s important to understand what you might be gaining (and losing) once that property deed is in your hands. We’ve compiled a comprehensive list of pros and cons of buying a house to help you decide.
The Pros Of Buying A House
Buying a house will likely be the biggest investment (with ample rewards) that you’ll make in your lifetime. We can’t explain why people enjoy nesting, but we can explain the advantages that come with putting down roots.
Buying A House Is Generally A Good Investment
Think of it this way: Instead of paying your monthly rent to a landlord or corporation, you can start buying into your own home equity. Consider your house a long-term piggy bank. As you build equity, your home value increases. You can also cash-out refinance a portion of your home equity if your family falls into debt or the kids need help financing their college degrees.
The best-case scenario may be that you pay off your fixed-rate loan within 30 years as planned and enjoy your retirement with much lower monthly expenses. Buying is arguably much more attractive than paying landlords rent money until the bitter end.
Not to mention, homes generally appreciate in value over time. A recent Home Price Insights Report found that the average home price index went up 5.5% in July 2020 when compared to July 2019. This, of course, depends on the location.
For example, home prices in Las Vegas are predicted to decline by 7.8% by July 2021 in response to the pandemic’s effect on tourism. On the other hand, the COVID-19 pandemic has been a boon to suburban areas, such as Long Island. Whether you decide to sell your starter home in 5 years or plan to downsize in retirement, you’re likely to walk away with a profit from just living there and waiting for the market to appreciate in value. Plus, that capital you make when you sell your house may qualify you for a capital gains exclusion, allowing you to enjoy that income tax-free. Speak with an accountant or tax preparer if you’re unsure what you qualify for.
Build Good Credit
As you maintain regular mortgage payments, your credit score will increase over time. Of course, your credit score will take a downward dip once you take out the loan. That’s because, on paper, you have a sizable debt on your hands that you’ve yet to prove you can repay. As you make regular on-time payments, that debt will look more and more like responsible debt, which can help raise your credit score. Just be sure not to take out any large loans at least 6 months after taking out your mortgage.
Fixed Monthly Payments
If you’ve ever rented in a metro area like New York City or Los Angeles, you know how destabilizing it can be to reach the end of a lease and decide between a costly move or a 10% increase in monthly rent to stay.
Entering into a fixed-rate mortgage means that you’ll pay the same monthly principal plus interest every month throughout the term of the loan, assuming a fixed-rate mortgage. As the market appreciates in value and inflation rates rise, you’ll be paying the predictable monthly payment over the usual 15- or 30-year period. Of course, homeowners insurance premiums and tax laws may change and your property taxes may fluctuate based on property value, but, generally, you can expect your monthly mortgage payments to feel more and more affordable as inflation increases.
Stable Housing, Stable Neighborhood
According to the U.S. Census (Table A-4), homeowners are four times less likely to move in a given year compared to renters. That same study shows that only 4.9% of homeowners moved between 2018 to 2019, compared with 19.7% of renters. Of course, the reason for those moves varies from job relocation to unsustainable increases in rent costs. Regardless, according to the findings from the National Association of REALTORS®, communities that have residents settled in for the long haul often have stronger social ties, civic engagement and social capital.
If one of the greatest allures of homeownership is passing down a home that’s fully paid for to your children, you’re not alone. Your neighbors will likely feel the same way, and will fight to create a stable, safe neighborhood for their children.
Unlike renting, or even owning condos or townhomes, buying a house lets you have total control over your home. You may not need to ask permission from an HOA board or landlord to make a home renovation to match your lifestyle. No more limits on pets or toeing the line on noise restrictions with the apartment next door. Start a garden bed if you want to and adopt a litter of kittens. The only rules you need to follow are codified laws and those set forth by your lender or HOA, if there is one.
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If homeownership is so ideal, then why isn’t everyone doing it? There are several reasons why some prefer renting, and the more you learn about the challenges, the less daunting they might seem.
Down Payment And Other Upfront Costs
It used to be that a 20% down payment was the biggest barrier for renters to become homeowners. The industry has changed so drastically that the 20% down payment is widely regarded as myth. Today, you can qualify for a mortgage with as little as 3% down. There are even a couple of government-backed zero-down mortgages that require no down payment. Granted, the lower your down payment, the higher your monthly interest rate and monthly mortgage insurance payments, but it gets your foot through the literal door of your first home.
Other upfront costs to save for include closing costs to your lender, which typically amount to 3% – 6% of the total loan. So, if you’re planning to buy a $100,000 home, you should expect to save at least $6,000 to $12,000 to cover upfront costs once you factor in the down payment as well.
Maintenance Repair Costs
Predicting maintenance costs isn’t an exact science, but it’s always better to be prepared than caught off guard with a costly, emergency repair.
A good rule of thumb is to set aside 1% – 3% of your home’s purchase price annually in order to cover home maintenance and upkeep. However, if your home is 25 years or older, you may want to set aside as much as 4% of the purchase price per year for upkeep. Although you may be thinking about saving money for a down payment on a home, it may be a good idea to be sure you have plenty of money to cover the costs of repairs throughout the year.
Property Taxes And Other Regular Fees
As a homeowner, you can expect to pay a variety of fees. Your lender may charge some of these fees monthly and put them into an escrow account to avoid you the headache of paying large sums at a time. Some of these regular fees may include but are not limited to:
- Property taxes: Property taxes are what help pay for local services like roads, schools and fire department services. Your lender will likely include this in your monthly payment to go towards your escrow account.
- HOA fees: If you’ve purchased a condo or townhouse that operates under a homeowners association (HOA), you can expect to pay HOA fees that help pay for community amenities like a gym, pool or security system.
- Utilities: Landlords may cover some utility costs, such as trash collection or water. As a homeowner, you not only need to cover these costs yourself, but utility bills will likely be more expensive in a larger home than in an apartment.
- Homeowners insurance: Lenders will often require proof of homeowner’s insurance to be sure that your home asset will be protected. Homeowners insurance typically covers dwelling damage and liability damage. Your lender will likely include this in your monthly payment to go towards your escrow account.
- Private mortgage insurance: Your lender may require you to pay private mortgage insurance (PMI) if your down payment is less than 20% of the purchasing price on a conventional loan. PMI helps protect the lender in case you default on a payment. Once you’ve reached 20% equity in your home through regular mortgage payments, you can request to stop paying PMI fees.
Buying a house is often tied with “putting down roots” for a reason. If you’re making the switch from renting to buying, keep in mind that the process of selling your home can take months or even longer depending on the housing market. That can make it harder to respond to starting a dream job across the country or moving closer to home to care for older parents.
You need to be prepared to metaphorically root yourself to your home for at least 5 years if you expect to make any capital from selling your home. That said, you may have the option to lease the home to head out on short-term trips. Regardless, expect a more complicated moving process than moving out of a rental.
Get Started: Learn More About Buying A House
Only you can know if homeownership is right for you. Make sure you spend time evaluating the pros and cons of buying a house and everything that comes with homeownership before you decide what’s right for you. Wherever you’re at in your journey, Rocket Mortgage® can help you when you're ready.
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