Is Homeownership Worth It?

Megan writes in:

My husband and I are looking at purchasing a home next year. My parents and siblings think this is a great move and are giving me info on buying a home and how great the investment is. His family is adamantly opposed and they say that homes are a money pit that just eat your wallet and barely appreciate historically. Which side do you think is right? My guess is that the truth is somewhere in the middle, which is what usually happens when you have two extreme opposing views.

Compare Mortgage Rates

Compare top mortgage lenders in your area and find the right fit for you.

In this article

    My view is somewhere in the middle, but I actually lean more towards your husband’s family than your family. I’m speaking from pure experience here — homeownership is a giant money and time pit.

    The easy way that most people compare the cost of homeownership to the cost of renting is to compare the monthly mortgage payment to the rent and go for whichever option is cheaper for whatever housing you need. If you go strictly by that, then you’re going to find yourself in a pickle, because there are a bunch of additional costs that come with homeownership.

    For the items below, I’m going to base everything on a $200,000 house in my area. The numbers will vary a lot from area to area — this is just to provide a concrete example of what I’m talking about.

    [ More: 17 Things to Know Before Buying Your First Home ]

    Other factors of homeownership

    Maintenance costs can be significant with homeownership. I usually encourage people to hold back 1% of their home’s value each year for appliance replacement and other maintenance tasks. With a $200,000 home, that adds up to $2,000 per year, or $167 per month.

    Property taxes are also a significant expense. In my area, property taxes on a $200,000 home will end up being around $3,600 per year, or $300 per month.

    Insurance is much heavier for homeowners as well. Rental insurance just covers the possessions, while homeowners’ insurance covers the possessions as well as the cost of the property. This will vary a lot depending on your exact situation. You can roughly calculate your cost by dividing a house’s value by 1,000, then multiplying the result by 3.5. This means the annual premium for the home being discussed here is about $700. Our home insurance cost by state guide provides a more precise look at the average costs in your home state. For rental insurance, you can expect to pay about $180 per year. Thus, for homeowners, the extra cost per month for insurance is about $43.

    Just from these items, it’s very reasonable to figure that owning a $200,000 home versus renting will cost you an extra $500 per month, even if the rent and the mortgage are equal.

    What about the factors that make homeownership less expensive?

    The tax-deductibility of mortgage interest is certainly one factor. During the first year of a 30-year fixed 3% mortgage for $200,000, you’re going to end up spending about $4,750 on mortgage interest. If we also assume that only half of that interest is above and beyond the standard deduction (because you’d get some benefit from the standard deduction if you were renting), that’s $2,375 in savings per year, or nearly $200 per month. This is a number that’s really hard to perfectly estimate because of the huge variation in personal situations, of course.

    The appreciation of the home’s value is a highly variable factor. My assumption would be that home prices will appreciate according to the historical average – around 3%. This would be an annual increase of about $6,000 for the home in question, or $500 per month.

    However, there’s a catch. As the home value increases, so does the cost of maintenance (due to inflation) and the cost of insurance. For every $6,000 in value the home increases, the taxes should be expected to increase by $9 per month, the maintenance by $5 per month, and the insurance by $1.50 per month or so, which adds up to an extra $186 per year.

    Here’s the reality of it, from my perspective. Homeownership devours your liquid money. Each month, you’re going to be spending more money if you own a home versus renting a place for roughly the same monthly payment.

    However, that investment is, on average, recouped by the increase in value of the home. In fact, over the long haul, it’s more than recouped.

    [ See: Is Now the Right Time to Buy a Home? ]

    This introduces the real benefit of homeownership: building equity. When you rent, your monthly payment essentially goes to the landlord without any investment benefit on your end. When you own, however, the money you spend on your mortgage principal goes toward paying off your home.

    The problem comes down to cash flow. If you’re walking a tightrope just to be able to swing the monthly costs of homeownership and you slip and fall, you may not recover much of anything at all because you’re completely at the mercy of the short-term housing market in your area. If it happens to be booming, you might be okay — if it’s not, you could be in trouble.

    (We won’t get into the time factor, but suffice it to say that it’s much easier to just call a landlord when you have a problem than to try to handle it yourself or to call an expensive repair person.)

    So, what should you do? If I were in your shoes, I’d look carefully at the neighborhood where I was thinking about buying. Are there lots of houses for sale in that area? Does the neighborhood look nice or is it run down? I would lean toward buying in an area that seems to be in good shape without a lot of houses for sale, and lean away from buying in an area that seems run down with a lot of houses for sale.

    Why? If you’re taking out a mortgage, you should be worried about the short term. What happens if the expenses are too much? What happens if someone loses a job in year two of that mortgage? You’ll probably need to sell fairly quickly and you’ll ideally hope for a small return on that sale. That’s going to be far harder to do in a run-down area.

    During the housing collapse in 2008 and 2009, a lot of people discovered the hard way that they didn’t account for that short term and they found they couldn’t keep paying the bills. They also found that they couldn’t sell the property easily and get enough of a return. So, what did they do? They dropped the keys in an envelope, walked away, and found themselves with less money in hand and with a deeply tarnished credit report. That’s a risk of homeownership and it’s one that you should try to avoid. Make sure you’re buying a home you could resell easily.

    The only exception to that is if you’ll be buying a property where the mortgage payment is significantly below your current rent. In that situation, you should be able to weather any storms that blow your way.

    [ Read: The First-Time Homebuyer’s Guide ]

    Again, this is just my take as an experienced renter and homeowner. We bought a home in an area where we could resell it easily if we needed to. In the end, I think it was a smart move, though our monthly living expenses certainly went up after the move.

    Tips on owning a home

    If you’re considering buying a home, it’s a good idea to follow these to protect yourself:

    • Carefully calculate your monthly expenses: There are quite a few expenses to consider when it comes to homeownership. Luckily, there are tools to help you determine how much house you can afford and to calculate your mortgage so you don’t end up over your head.
      If you get a mortgage preapproval from a few lenders and ask for estimated fees worksheets it can help you get a clear idea of the costs you should expect, too. Don’t forget to budget for all utilities and property taxes as well. Make it a point to have a little set aside for maintenance, too.
    • Understand your local market: Two things will make a big difference when you want to sell the house you’re about to buy: how much its value has appreciated and how competitive your local market is. Make sure you buy a house that is likely to appreciate in value through the years, and look back on past decades to get an idea of what you can expect. Don’t buy in areas where the real estate market is struggling.
    • Shop your options to minimize costs: You can minimize your homeownership costs by shopping around. Compare rates from mortgage lenders, home insurance providers and utility providers to make sure you’re getting the lowest price possible for these services.
    • Plan to stay long-term: When you buy a house, you’ll pay some closing costs or upfront fees to get the house inspected and get your mortgage in place. In most cases, your home’s value will appreciate enough over time to cover those costs. The key here is that appreciation takes time. Don’t buy unless you plan to stay in the house for at least a few years.
    • Minimize your other debts: To make homeownership costs as comfortable as possible, work to pay off other debts before you buy. Get aggressive with your credit card debt and student or car loans. Shrinking these debts will also help you get a better mortgage rate.

    Compare top mortgage lenders

    We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

    Trent Hamm

    Founder & Columnist

    Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

    Reviewed by

    • Angelica Leicht
      Angelica Leicht
      Mortgage Editor

      Angelica Leicht is an editor at The Simple Dollar who specializes in mortgages, mortgage refinancing, home equity loans, and HELOCs. She is a former contributing editor to Interest.com and PersonalLoans.org.