Home ownership can help you increase your net worth over time. According to US Census data, home equity and retirement accounts combined accounted for more than 60% of a typical household’s wealth. And those who owned rather than rented had a median net worth more than 80 times higher than the median for renters.
Now, part of the disparity can probably be attributed to the fact that people are more likely to buy property if their financial lives are already more secure. Indeed, a stable job and good credit are prerequisites for the purchase.
Still, that doesn’t mean that buying a home is the right choice for everyone — or even that all homeowners will eventually get away with it financially. Whether buying a property helps you build wealth or turns out to be a big mistake depends on several factors, including the following key questions.
1. Are you financially ready to own?
Buying a house when you’re not in a good financial position probably won’t improve your situation and, in fact, could make things much worse.
Homeownership comes with a host of expenses beyond your mortgage, including upkeep and upkeep, repairs, property taxes, insurance and, in some cases, association fees. If you can’t afford these expenses, or if paying your monthly housing costs prevents you from doing other important things, including paying off high-interest debt, saving for retirement, or building up a emergency, you may find it difficult to increase your wealth over time. time.
Worse still, if you buy a home but become unable to make the payments because your income drops and you don’t have a financial cushion, you could face foreclosure. This is an extremely costly ordeal that will leave your credit in bad shape and your financial life in dire straits.
You don’t want to risk that happening, so having a steady job and several months of emergency money saved up before you make your purchase is essential.
2. Did you buy the right property?
The specific details of the property you buy will also impact whether home ownership helps you build wealth. If you buy a home that isn’t nearly worth what you paid for or doesn’t hold its value, you could end up owing more than it’s worth. It hurts, rather than helps, your wealth building efforts.
To make sure you don’t end up in a home considered a lemon in the real estate world, work with a real estate agent who can give you some insight into your purchase. Compare the price of the property to comparable homes and pay attention to issues affecting resale value, such as the school district or if zoning changes are imminent.
3. Will you be staying in the house long term?
If you plan to stay in a home for a long time, there’s a better chance you can build wealth by buying it.
You won’t have to incur repeated high transaction costs associated with frequent buying and selling. And if you happen to make a profit, you can limit or avoid paying capital gains taxes – and if taxes are owed, they can be at the lower capital gains rate instead of the ordinary income rate. higher. And over time, you’ll build more equity – hence more ownership – and the property will be more likely to have appreciated in value.
If, on the other hand, you plan to move after a short time, you may not be able to recoup closing costs and other costs that are offset over time by the appreciation of the property. This means that you could end up having to pay out of pocket to walk away from the asset.
4. Did you qualify for an affordable mortgage that you can easily pay off?
Finally, the type of mortgage also matters. Most long-term mortgages carry low interest rates, and all or most of this expense is tax deductible for those who itemize their deductions. This can make the debt you take on more affordable compared to what the home might one day be worth.
But if you only qualify for a high-interest loan, or opt for a confusing mortgage, such as an adjustable-rate mortgage or an interest-only mortgage that could result in soaring payments, you could become unable to cover monthly bills and risk losing your property. This happened to many buyers during and after the housing bubble before the 2008-09 financial crisis.
You don’t want to regret buying your home, so be sure to ask yourself these four questions before deciding if going ahead with the offer to buy a home is the right choice to help you create wealth.