Myths about homeownership that could persuade you to buy for the wrong reasons.
Each month you send a rent check to your landlord. Meanwhile, every homeowner you know insists that you’re wasting that money. They say that you should buy a home and that owning is a smarter financial move.
SEE ALSO: Retirement Planning Mistakes You’ll Regret Forever
But are they right? Not necessarily.
There are good reasons to buy a home: You get a place to call your own and raise your family. You get more space. You’ll gain more — but not complete — control over your monthly housing payments.
This doesn’t mean, though, that owning is always the better financial choice. In fact, there are many myths about homeownership that could persuade you to buy for the wrong reasons. Here are four of them.
Advertisement
1. Owning a home is a great investment
It might seem that purchasing a home, holding onto it for years, and then selling it for a profit is a great reason to buy. But the truth is, homes aren’t good investments for most owners.
Robert Shiller, a Yale economist, has long studied the housing industry, and ranks as a true expert when it comes to real estate and economics. Speaking to The Motley Fool in 2014, Shiller unveiled the numbers proving that housing historically has not been a good investment.
Shiller found that from 1890 through 2012, home prices when adjusted for inflation did not grow one cent. Homeowners would have made significantly more money by investing in the stock market during this same time. Shiller reported that the value of the S&P 500 increased more than 2,000 times from 1890 through 2012. Shiller also found that from 1890 through 1980, the real value of home prices actually fell by about 10 percent.
Don’t buy a home thinking that it’s a smart financial investment. It’s not. A home is a place to raise your family and retreat to at the end of a long day. It’s not supposed to be a moneymaker. (See also on WiseBread.com: Stop Thinking of Your House as an Investment)
Advertisement
2. You’re tired of throwing away your money on rent
Advocates of homeownership often tell you that you’re throwing away your money every time you pay a rent check. What they don’t say is that this doesn’t change much after you buy a house — at least not initially.
Most of us take out a mortgage loan to finance the purchase of a house. The bank behind your mortgage will technically own most of your house after you close on it. And in the earlier years of owning a home, the vast majority of the money you send toward the bank goes toward paying off interest. Only a small amount of each monthly payment goes toward paying down the principal of your balance.
So, you’re still throwing your money at someone with nothing concrete to show for it. You’re just throwing it at your bank instead of your landlord. And if you don’t hold onto your house long enough — say, more than seven years — you’ll have paid far more in interest than in reducing your principal balance by the time you sell. (See also on WiseBread.com: Why I Choose to Rent Instead of Buy)
3. You can build equity
Earning equity is one of the most popular reasons for people to buy a home. Say you owe $150,000 on your mortgage and your home is worth $220,000. You now have $70,000 worth of equity. You can borrow against that in the form of a home-equity loan or home equity line of credit to pay for everything from a child’s college education, to major home improvements, to reducing credit card debt.
Advertisement
You earn equity in two ways: First, every time you make a payment, you are reducing your mortgage amount. Second, if your home increases in value, your equity will grow automatically.
The problem is that home values can fall, and building equity when that happens is a true challenge. Say after three years of owning your home, you’ve reduced your mortgage amount to $200,000. If home values have fallen since you purchased your residence and your home is now worth just $190,000, you don’t have any equity. Instead, you are underwater — meaning that you owe more on your mortgage than what your home is worth. (See also on WiseBread.com: 6 Times It’s Actually OK to Be Underwater on Your Home)
You can’t control whether the value of your home falls or rises. Millions of homeowners discovered this in 2007 and 2008, when home values across the country plummeted. Many of the owners who bought in 2005 and 2006 still owe more on their mortgages than what their homes are worth. Building equity isn’t a guarantee.
4. Owning a house comes with big rewards at tax time
Advocates of buying a home point to the deductions that owners can take come tax time: Owners can deduct the interest they pay on their mortgages, as well as their property taxes.
Advertisement
But these deductions are becoming less valuable to some people. First, the new tax reform law says that owners will only be able to deduct the interest on their mortgage loans up to $750,000, rather than the $1 million that it was previously. Federal tax reform will also limit the amount that taxpayers can deduct in state and local property and income taxes on their federal returns to a maximum of $10,000.
The biggest change, though, might be the new standard deduction. Taxpayers filing their federal returns can either itemize their deductions or take the standard deduction. Tax reform will boost the standard deduction from $6,350 to $12,000 for individuals. It will increase the standard deduction for couples filing jointly from $12,700 to $24,000.
SEE ALSO: How Smart a Home BUYER Are You?
There is no financial reason for taxpayers to itemize their deductions if they aren’t greater than the standard deduction. As the standard deduction increases, a greater number of taxpayers will take it instead of itemizing. This means we’ll see fewer homeowners taking advantage of the property tax and mortgage interest deductions.
This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website.
More From Wise Bread
This article is from Wise Bread, not the Kiplinger editorial staff.