Like getting married or having a baby, many first-time homebuyers see buying a home as a big step toward building a prosperous life. But that enthusiasm can make it easy to overlook the risks and potential downsides of owning a home.
Before you commit to the financial obligations of buying a home, it’s important to know that homeownership doesn’t always work out as planned.
Why People Buy Homes
Many people work for years toward the goal of buying a home — and with good reason. Overall, home values have increased reliably and steadily for decades. But, as with any investment, it’s important to remember that coming out ahead is not guaranteed.
A home likely will increase in value
Buying a home offers more than a roof over your head — it also can be a savvy financial investment.
In general, real estate is considered a good investment because homes typically appreciate over time. However, it’s important to remember that this isn’t always the case. Changes in the housing market affect a home’s value, and many of these factors are largely outside of your control.
You can help preserve your home’s value with regular maintenance to keep it in good condition. Many homeowners also renovate or upgrade key features to give their homes a value boost.
More-predictable housing costs
If you’re used to renting, then you know rent can — and often does — increase. Just how much the property owner legally can raise the rent depends on where you live. These increases can be frustrating and expensive, but homeownership offers a way around it.
Buying a home with a fixed-rate mortgage locks in the interest rate for the life of the loan. This means your monthly mortgage payment — excluding insurance and taxes — will remain the same as long as you have that loan. Having a fixed interest rate on your mortgage helps stabilize your housing costs and provides some peace of mind that you can afford your home as long as you own it.
Homeowners can do what they want with the property
Renters lack control over how well the buildings and grounds are maintained. Property owners also usually set rules about what renters can do to a home, and often prohibit repainting the walls or removing carpets.
Owning a home means you’re the boss, especially if you’re not subject to the rules of a homeowners association. You can repaint the exterior and interior, upgrade the appliances, remodel, add a pool — you name it. Buying a home gives you autonomy to make changes to your property.
Significant tax benefits
One of the biggest tax breaks available to homeowners is the ability to deduct what you pay in mortgage interest from your taxable income. Another useful deduction is for discount points, which borrowers can pay the lender upfront in exchange for a lower interest rate. Homeowners also may be able to deduct property tax payments and private mortgage insurance premiums.
The differences between renting vs. owning a home
Buying a home is often thought of as a more worthwhile investment than renting, but there are different pros and cons to buying vs. renting.
Renters can move relatively easily whenever they need to, and they have lower upfront costs compared with the closing costs that homebuyers have to pay. Renters also don’t have to directly pay property taxes, homeowners insurance, and maintenance costs. In general, there’s less financial risk in being a renter because you don’t have to worry about maintaining the property or its value.
Perhaps the biggest advantage to buying a home is that your mortgage payments build equity for you. Equity is how much your home is worth minus what you still owe on it. In other words, it’s the amount of your home that you actually own. Each time you make a mortgage payment, you’re building equity — a perk that renters miss out on. Without equity — and, eventually, full ownership — renters need to make payments to a property owner indefinitely.
What Could Go Wrong After Buying a House?
One of the most unrealistic expectations that prospective buyers have is that homeownership is always a great decision — a bet you can’t lose, says Blaine Thiederman, founder and principal advisor at Progress Wealth Management in Arvada, Colorado.
“Homeownership is a huge risk, especially if you have a large mortgage that depends on you and your partner’s income remaining stable,” Thiederman says.
Here’s a look at the financial risks of being a homeowner.
A common financial risk of homeownership is that the home’s value decreases. As a result, the homeowner loses equity, and might owe more on their mortgage than the home can be sold for. The homeowner would be unable to refinance or borrow cash against their equity. If they have to sell, then they would be selling the home at a loss.
There are several reasons why homes depreciate. Some homeowners underestimate the cost of repairs and maintenance in addition to the more obvious cost of paying the mortgage. If you fail to maintain your home and it starts to appear run-down, that’s going to hurt its value.
Even if you do a stellar job with upkeep, your home’s value also depends on market conditions. During the 2008 financial crisis, for example, national home prices plummeted by more than 20% on average.
Local factors can drive down the value of your home as well, especially if there’s an undesirable addition to your neighborhood — like a noisy venue or a power plant.
Risk of default
When you’re taking out a mortgage, it’s important to be certain you can afford the loan and won’t fall behind on your payments. However, changes in your income and employment — or events outside of your control that affect your income — could make covering that monthly payment more difficult down the line. Examples include losing a job, a natural disaster or accident damaging your home, or an unexpected injury or illness that affects your ability to work.
Changes to your mortgage also can affect its affordability. If you have an adjustable-rate mortgage, your interest rate will change according to market conditions. An increase in your interest rate will raise your monthly payment and could make it more difficult to pay.
Failure to make your monthly payments leads to foreclosure. If the lender forecloses on your home, it would repossess the property and you would have to move out. You also would be left with a poor credit report, which could make it challenging to buy or even rent another home.
Expensive problems and unexpected headaches
The inspection is supposed to be thorough enough to uncover any major issues with the home, including anything that is broken or poses a health or safety risk. However, the inspector only looks at areas of the home that are visible and accessible. Home inspections also generally don’t cover mold, asbestos, lead, air quality, pests, or termites. This means you could end up paying for unexpected and expensive repairs to fix hidden problems.
There will be aspects of living in your new home that you won’t know until after you move in. This could include anything from noisy neighbors to a fire station up the street that sends out trucks with loud sirens all day. A renter has a lot more freedom to move out of these situations, but a homeowner would have to sell — and risk a loss — to move quickly.
Are the Risks Worth Buying a Home?
Many of the risks of homeownership involve unexpected costs threatening your ability to afford your mortgage. To take on these risks, you must be confident that you can cover your monthly payment and the other costs of homebuying, such as homeowners insurance, property taxes, and HOA fees.
According to Thiederman, another way to reduce your risk is by making sure that your home inspection is as thorough as possible.
“If you get a talented inspector that inspects for mold, pests and builder flaws, this helps to lessen your risk as a buyer,” he says. “In addition, a good Realtor will guide you to help you pick the right house.”
While there’s a risk that your home can depreciate if the housing market declines, Thiederman says that you don’t have to panic when it happens, as long as you don’t need to sell your home anytime soon.
“Market swings aren’t that big of a deal unless you plan to — or need to — sell your home during the year the market is low,” he says.
Consider the following rundown of the different pros and cons of buying a house.
Advantages of owning a home
Here are some of the benefits of owning a home:
- Appreciation can drive up the home’s value and your equity.
- If you’re qualified, you could borrow cash against your equity when you need it.
- You can do what you want with the property.
- A fixed-rate mortgage lets you lock in predictable monthly payments.
- If you pay off the mortgage, you won’t have to make monthly payments when you’re older.
- You can put down roots in a place that feels like home.
Disadvantages of owning a home
Keep in mind some of the potential downsides of homeownership:
- Depreciation can drive down the home’s value and your equity.
- You could end up losing money on the home.
- There are additional costs to pay, such as homeowners insurance and property taxes.
- You can uncover an expensive flaw or safety issue after you move in.
- You may become unable to afford your mortgage.
- You could be liable if someone gets injured on your property.
The Bottom Line on the Risks and Benefits of Owning a Home
For many buyers, homeownership is a dream come true. It’s an opportunity to build equity and have the freedom to make the most of the space. Unfortunately, homeownership doesn’t always work out, and buyers could end up losing money — or even the home itself. But you can set yourself up for success by understanding and preparing for the financial risks.