I recently read an article on MSN.com about underwater homeowners that made me a little angry. First, the article’s focus was on a young lemming, I mean man, who was only $30,000 “underwater” on his mortgage. I say “only” because though he may be slightly upside down on his mortgage, $30,000 isn’t nearly as much as some current homeowners today. Second, the reason this young man was the focus of the story was because he was hoping to find a job elsewhere and felt “tied-down” to his house. Didn’t he think about this commitment when he purchased his house to begin with? Obviously not.
The recent housing bubble seemed to entice many people into home ownership without thinking about the true consequences of owning a home. It sort of reminds me of the lemmings all falling off a cliff together. As a person on a mission to own a home in the near future (though that may be anywhere from 1-3 years from now), there are some definite advantages and disadvantages that need to be clarified:
Advantages of owning a home:
- If you live in your home long enough (usually a minimum of 5-7 years), you can make a small profit or at least recoup some of your mortgage payments. With renting, you never recoup any of the money you paid over time. Some will argue that renting costs much less than owning and you can invest the difference. However, I beg to differ. I live in an area where rent is about the same as a mortgage (at least at this moment in time).
- You can settle into your home knowing you’ll be there as long as you’d like (providing you continue making your mortgage payments!) Renting a house means you are subjected to the owner eventually selling the place or raising your rent beyond what you can afford. At least with a mortgage, you know how much you are paying each month (unless, of course, you didn’t read the fine print!)
- You can decorate your home anyway you feel. As a renter, I’ve had to repaint walls back to eggshell white because my creative inspiration ticked off the landlord.
- You can keep as many pets as your city allows you to. Another disadvantage with renting – some places don’t allow pets or have a maximum allowable amount (usually 2).
- Tax write-offs. Some of your interest can be written off your taxes. I’m not very familiar with this. Anyone care to comment on this advantage?
Disadvantages to owning a home:
- If you need to move to find a new job, you might have a harder time moving. With a mortgage, you’ve signed an agreement to pay on the property for 15 to 30-years. Of course, there are alternatives to selling your home, you could rent it if need be. In contrast, as a renter I can move with a 30-day notice; no strings attached.
- If you purchased your home at the peak of a housing bubble, your home may have lost thousands if not hundreds of thousands of dollars on your investment. Obviously, this could be a serious negative consequence of owning a home. However, if you’re willing to live in the house 15-30 years, you might be able to recoup that loss due to appreciation. This doesn’t apply to renters.
- You might see your home as an ATM and pull out whatever equity you’ve built up. A common trend seen during the past bubble was people taking out home equity loans, or easy money. Those loans need to be repaid and now that the homes aren’t worth what they were, they now have negative equity. Renters are never in a position to “borrow” back some of the rent they paid so that easy money loan stuff doesn’t exist.
- Home repairs. In order for homes to remain in a livable condition, annual maintenance and repairs need to be completed. Depending on the state and age of a home, those repairs can be costly. As a renter, I’m technically not responsible for repairs, which theoretically saves me money. (Someone needs to remind my landlord of this!)
I’m sure there are more advantages and disadvantages that I could list. The bottom line is most people have to pay for shelter. You can either own that shelter or rent it. Because of the recent housing fiasco, many people view owning property negatively. Yet there are still benefits to both renting and owning. So don’t be a lemming! Weight the pros and cons then make a sound financial decision based on your own needs.
Next week I’ll be reviewing a book called Renter’s Win, Homeowner’s Lose. The title alone piqued my interest. Stay tuned for my review….
What other advantages or disadvantages am I missing? I’m I way off the mark?
8 Comments
You are right! There are more housing options available than most people consider. Evaluating them all in light of individual circumstances helps one to make the best choice. When I think about home purchasing I am always aware that no one “owns” a home until the final payment is made. Up to that point the bank is the primary shareholder and we are merely the managers.
.-= Carol@inthetrenches´s last blog ..Living on One Income- How to Make it Work =-.
I love the fact that in 6 1/2 more years, I will only have property taxes to pay every year for my housing (about $2500-$3000 a year). That makes me soooo happy. 🙂
@Carol@inthetrenches
Your very right in thinking that way. Too many homeowners think “they” own their homes, when in actuality the banks own them! My sister in law just mentioned to my husband that she really would like to dump her home now that she’s lost so much on the deal. However, buying a house is a long-term commitment; not a fly-by-night strategy toward wealth.
@Budgeting in the Fun Stuff
Wow! That’s pretty impressive. Not many people as young as you can claim they will own their homes outright within the next decade. Good for you!
One benefit to add..you can have wild parties without disturbing the other tenants in the apartment complex.
I way underestimated the cost of maintenance and repairs..both wrt time and money.
(Although the two places I bought were both fixer uppers so that’s part of it)
Early on in a mortgage it’s almost like being a renter when you have $900 of your $1000 going to interest payments. Tax deductible or not, it’s still money getting sucked out of your bank account that does not build equity.
@Sandy L – Love the wild parties advantage! My husband and I have been talking about buying a fixer upper and I can see where it’s easy to underestimate the amount of time and money. Thanks for sharing your thoughts!
There’s NO WAY that a house presently $30,000 underwater is going to regain enough value to make even a small profit for someone who bought in the past three years.
My son and I copurchased a 1300-square-foot house in what was then a gentrifying part of town at the point where we and our Realtor thought the market had hit bottom. We paid $235,000 for it, and neighbors cursed the seller for taking what they thought was way to little. Just now two houses in the neighborhood, same builder same size, are on the market for $99,900.
We planned to hold the house for five years and then rent or sell. That was three years ago. As we watched values plummet, we revised our plan to a ten-year hold. We are now told by people who claim to understand these issues that values in this region will NEVER return to pre-bubble values. That’s pre-bubble, not height of bubble. The truth is, anyone who owns real estate in the American Southwest is royally screwed. Unless something is done to force lenders to adjust principal to reflect reality, we’re looking at a vast cohort of people who will be forced to declare bankruptcy or default.
Fortunately, he likes the house, although it galls both of us to have to pour good money after bad into the black hole of mortgage interest on a loan for twice what the property is worth. Yes, it does have some advantages: elbow room between you and your neighbors, being able to own a pet if you desire, lots of room to entertain friends, an enclosed garage to park your car in, a central location close to work. But the disadvantages outweigh the advantages significantly: money going down the toilet, maintenance costs on a dog that will never be worth what we’re paying for it, and yes…the feeling that he is trapped and can’t take job opportunities in other cities, should they arise. That’s not an illusion: it’s a reality. Unless we default, there’s no way we can get rid of the house without losing many tens of thousands of dollars. Rent it? Don’t think so! The mortgage is $1,300/month; rent rates in the neighborhood are around $850 a month.
There is NO silver lining for people who own real estate in our region. Nor does it make sense to suggest that we should consider our “commitment.” We committed to buy a modest home at what we believed to be a fair price, and to hold it for five to ten years. We did not commit to go broke!
.-= Funny about Money´s last blog ..Hurrah! Another One Is Back! =-.
@Funny About Money – The day my post “went live” my husband talked to his sister who also lives in the southwest. She’s in the same boat; she’s lost HALF her home’s value. I think the southwest region was hit especially hard. My only point to the MSN article was that this particular young fellow isn’t really upside down as much as others are. Because he owns his home in the northeast, he will probably be able to recoup his loses within a few years. However, if you look at home prices historically, most do eventually go up in value through appreciation over time (of course, that time frame is usually 10-20 years.)
I also want to add a personal note: I live in SoCal. Prices go up and down like a roller coaster. About 18 years ago, prices bubbled and people who bought at the peak were in deep doo-doo when the prices tanked. Yet, 15 years later, the housing market boomed and if those people had held onto their homes, they were in good shape. So, the southwest may look like it will NEVER go back up to the prices they were at 3-5 years ago. But sometimes, history repeats itself! Hopefully in your case it will repeat itself, it just might take it’s sweet time to do so.