While home ownership is often promoted as part of the “American Dream” and a sound financial decision, another point of view might be considered. Home ownership may not be for everyone when considering these drawbacks:
- A home is not an investment. Over the past 120 years, the real return of the value of homes has been less than 0.5 percent a year,
- Home ownership can be a money drain. Mortgage payments and other costs, such as property taxes, maintenance, repair, insurance, and utilities can add up to a significant portion of a household budget.
- The mortgage tax deduction may not be worth it. If you do not itemize on your taxes, you will not get the benefit of this deduction.
- Consider the “rent-price ratio.” This analysis is determined by dividing the average home sale price by the average annual rent. A ratio of 1 to 15 is considered a range when it is better to buy than rent. Between 16 to 20, you are getting in to risky buy territory. Over 21, it may be better to rent than buy. Be sure to also consider how much space you need. Homes are usually larger than apartments.
- People often buy a larger house than needed, resulting in higher mortgage, insurance, energy, and maintenance costs as well as higher property taxes.
For additional information on the financial drawbacks of home ownership, click here.
- Have students ask homeowners for suggestions they would offer to people planning to buy.
- Have students create a financial analysis comparing renting and buying for comparable housing.
- What factors might you overlooked when deciding to buy a home?
- How you decide whether to rent or buy your housing?
“While our original $150,000–$170,000 price range would have put our housing costs at a manageable 30% of our total income, springing for a $200,000 loan shot that number up to just shy of 50%.“
For many people, a logical step after completing college is often purchasing a home and inching closer to the American dream. And yet, there are pitfalls to obtaining a home that can lead to financial stress and the inability to reach important short-term and long-term financial goals.
This article describes how one couple took all the right steps to prepare for a home purchase, but eventually decided to purchase a home that cost more than they planned to spend on housing. The reason was simple: They fell in love with a home that was too expensive when compared to their total income. The article continues to describe what happens next in their attempt to regain their financial health.
For more information, click here.
You may want to use the information in this blog post and the original article to
- Stress the necessity of preparing a realistic budget that reflects mortgage payments, insurance, taxes, repairs, etc when purchasing a home.
- Share the advantages and disadvantages of owning versus renting a home.
- Given your goals and lifestyle, how important is home ownership to you?
- What steps should you take to prepare for purchasing your dream home?
- Assume you have found your dream home and you can afford the payments, insurance, taxes, repairs, etc. What steps are necessary to negotiate the purchase and obtain financing?
An increasing number of homebuyers are coming into the market. However, along with that trend, is an increasing number of financial regrets due to mistakes such as:
- considering that renting may still be a viable financial choice in some situations; for example, if you may be moving due to a job or other circumstances.
- with rising housing prices and higher mortgage rates, some buyers may not be competitive when bidding on a property.
- other debts (such as a high car loan) may limit the monthly payment a person can afford.
- putting too much faith in online property prices, which can give a false sense of true home values.
- skipping the home inspection can result in not being aware of subtle home defects.
- unrealistic expectations of the future appreciation of the home.
For additional information on mistakes made by homebuyers go to:
- Have students research suggestions for avoiding home buying mistakes.
- Ask students create an in-class presentation with suggestions for avoiding home buying mistakes.
- What actions might be taken to avoid these home buying mistakes?
- Describe other difficult situations that a person might encounter in process of buying a home.