Buying a home is the biggest financial decision many people make. Among the questions you need to ask yourself is why are you looking to buy?

“There is an emotional side to home ownership, particularly in the United States – it’s often baked into people’s vision of the future or part of the American dream,” said Tom Figgatt, president of Portolan Financial in New Orleans. “And it does feel good to own your own house; you can feel like it is a home and not just a temporary dwelling.”

But it’s not as simple as that. The benefits of home ownership don’t come without costs and limitations. Is renting a better option? The pros and cons of buying a house should be weighed up front.

Advantages and Disadvantages of Owning a Home

Before buying a home, it’s important to consider how such a purchase will affect your finances and your lifestyle. It makes sense to review all of the advantages and disadvantages of becoming a homeowner before making this big commitment.

What Are The Disadvantages of Owning a Home?

Equity doesn’t grow immediately: Most of the payments go toward interest in the early years of a mortgage, so you don’t gain equity quickly unless property values in your area skyrocket.
Illiquidity: Although houses have value, they typically don’t sell as quickly as stocks or other assets. While you’re trying to sell your home, you still have to keep making mortgage payments and maintain it.
High upfront costs: Closing costs on a mortgage can run from 2% to 5% of the purchase price, including numerous fees, property taxes, mortgage insurance, home inspection, first-year homeowner’s insurance premium, title search, title insurance, and points, which are prepaid interest on the mortgage. It can take about five years to recover those costs.
Less mobility: If one of the advantages of home ownership is stability, that means it will be more difficult to accept an attractive job offer requiring you to pick up and move to another city.
Maintenance costs: There is no property supervisor to take care of plumbing problems, and if the air conditioner goes out, you’re not only going to sweat until it’s fixed but you’ll be writing a check to get the cool air flowing again. The same is true of the landscape.
Property values can fall: That happened during the 2008 nationwide housing crisis, and more local conditions can cause this, too. Your building will depreciate over time, especially if you don’t maintain it.

What Are The Advantages Of Owning A Home?

Stable monthly payments: A fixed-rate mortgage means you’ll pay the same monthly amount for principal and interest until the mortgage is paid off. Rents can increase at every annual lease renewal. Fluctuating property taxes or homeowner’s insurance can change monthly payments, but that typically doesn’t happen as often as rent increases.
A good long-term investment: The Federal Reserve Bank of St. Louis reports that the average price of homes sold in the United States rose 28% in 10 years starting in 2009 and 10% from 2014 to 2019. Even if the value of the structure itself depreciates, the land on which it sits can become more valuable. You are investing in an asset for yourself rather than a property management company.
Building equity: Your equity is the difference between what you can sell it for and what you owe. Your equity grows as you pay down your mortgage. Over time, more of what you pay each month goes to the balance on the loan rather than the interest, building more equity.
Greater privacy: Also, since you own the property, you can renovate it to your liking, a benefit of home ownership that renters don’t enjoy.
Stability: People tend to stay longer in a home they buy, if only because buying, selling and moving frequently is difficult. Buying a home requires confidence you plan to stay there for several years.
Federal tax benefits: Mortgage interest is deductible, as is interest on home equity loans, property taxes and some closing costs when buying the home. However, Figgatt notes, tax law changes raising the standard deduction and capping deductions that can be taken on state and local taxes, make it less likely for younger people and those buying starter homes to enjoy those breaks.

Advantages and Disadvantages of Renting a Home

So, home ownership might not be for everybody, at least not in every stage of life. If renting a residence isn’t considered the American dream, not everyone in a nation of 330 million has the same needs or resources. So, before you buy, consider whether that is right for you right now.

Financial Disadvantages of Renting

No cosmetic improvements: If your home looks dated, you may just have to get used to it.
You can’t change the property: Would you like a deck for entertaining? Would you prefer a fenced yard? There’s nothing you can do about any of that in a rental except complain and see where that gets you.
Rent may increase: You may be comfortable with what you’re paying each month, but that could change when your lease comes up for renewal, typically in six months or a year.
You aren’t building value: When you leave your rental, all you take with you is yourself and the moveable property that belongs to you. It’s the property owner’s equity that grows, not yours.
No credit score improvement: While paying a mortgage on time improves your creditworthiness, you don’t get the same benefit from rent.

Advantages of Renting a Home

Low upfront costs: Except for a security deposit – often the cost of a month’s rent – you don’t have to write a big check or finance the costs required to get a mortgage. No HOA dues: Some homes are in developments with homeowner’s associations that require monthly dues on top of all the other expenses, and they aren’t optional. Not so with renting.
Rent payments may be lower: This certainly can be true if you’re renting an apartment, and it also may be the case when renting an identical house. If a mortgage is more than you can afford right now, renting makes more sense than being stretched too thin financially.
Repairs aren’t your responsibility: The property owner has to pay for that leaky faucet and anything else that breaks or wears out. So, you don’t have to factor those unplanned expenses into your budget.
Flexibility: If you want to relocate, having a mortgage can make that difficult. A house can take much longer to sell than you’d like, and if you move before it sells, you still have to make the monthly mortgage payments, so you’re paying for two residences while living in only one. Your obligation to a place you rent can’t exceed the length of the lease, and if the property owner can quickly find a new tenant, that can get you off the hook.

In assessing the pros and cons, Figgatt suggests you ask three questions.

1. Why are you looking to buy?

“If you’re looking at the purchase as an investment, it could work out very well, but high fixed costs mean the shorter the amount of time you hold the property for, the less likely you are to come out ahead relative to other investment opportunities out there,” he said. “Constantly buying and selling houses if you move frequently may be eating up wealth, not increasing it. And if you plan to rent the place out after you move, make sure you have a plan for managing the property – be ready to pay for that, too.”

2. Can you afford it?

“The down payment, closing costs and risk of sudden, very large expenses popping up combine to make it a very expensive proposition,” he said. “You need to save above and beyond your mortgage payment for infrequent yet major household expenses so that you keep it up properly. And making a smaller down payment and paying private mortgage insurance (which protects a lender in case you default on your mortgage) only increases the total cost of ownership.”

3. How long do you expect to stay in the house?

“It can be difficult to break even on a house if you stay in it for three years or less; the closing costs and commissions are significant, and expecting the house to appreciate in value enough within three years to make up for those costs may be setting your expectations too high,” Figgatt said. “And remember that your entire mortgage payment does not go towards the home’s equity. During the first year of your mortgage, depending on the terms, perhaps only about 30% of the principal and interest payments will actually go towards the principal of the home.”

Homeownership has always been part of the American Dream. Because of that, many people accept owning a home as the right, even obligatory thing to do without considering the benefits and the risks. If you are contemplating buying a home, you should know and review the pros and cons of the investment you are about to make—as you would any investment decision—before signing on the dotted line.

Pros:

The Tax Cuts and Jobs Act’s Effect

The Tax Cuts and Jobs Act, passed in December 2017, made substantial changes to the parts of the tax code that have to do with homeownership. Unless a future Congress amends the law, all provisions will expire after Dec. 31, 2025. But for now, changes in that law have reduced the value of owning a home.

The law limits mortgage interest deductions to $750,000 of total mortgage debt, including for a first and second home and any home-equity or HELOC loans. The previous limit was $1,000,000 in mortgage debt plus an additional $100,000 in home-equity debt.

There is an exception allowing $1,000,000 in total mortgage debt if you bought your home on or before Dec. 14, 2017. This provision even applies if you refinance that older mortgage. Home equity loan interest is only deductible if the money is used for substantial improvements to the home on which you took out the loan. Previously, interest on up to $100,000 was deductible no matter how the home-equity money was used.

The law also set the SALT deduction limit to $10,000. Previously, all SALT payments were deductible, unless you were subject to the alternative minimum tax.

Other new provisions include restrictions on claiming casualty losses except for federally declared disasters. The moving expenses deduction no longer exist except for the active-duty military moving for reasons of work.

All these changes have lowered the value of owning a home—including the fact that, with the doubling of the standard deduction (another feature of the Act), fewer people will have enough deductions to file Schedule A instead of taking the standard deduction. So the fact that you are eligible for a tax deduction does not mean that it will end up being useful to you. The severe limiting of the SALT deduction will be particularly detrimental in lowering available deductions for people who live in highly taxed states.

Attractive Long-Term Investment

Appreciation represents the increase in home values over time. Real estate prices are cyclical, and homeowners shouldn’t expect the property’s value to increase drastically in the short-term. But if you stay in your home long enough, there’s a very good likelihood you will be able to sell your home for a profit because of appreciation later in the future.

Despite some dramatic dips, such as that in 2008-10, residential real estate tends to rise in value. According to the Federal Reserve Bank of St. Louis, the average price of sold houses in the U.S. rose from $340,400 in Q3 2014 to $380,300 in Q3 2019—a 10% increase in value over five years. Go back a decade, when the average home fetched $274,100 (Q3 2009), and you have a 28% increase. That’s not a bad return on an investment that also provides you with a place to live.

Consider a home that is rundown and dilapidated to the point that it’s uninhabitable. The land underneath the home may still be worth a significant amount of money—more than the residence, in this case,. A seller may consider selling it as is—with the structure still intact—or spending a little extra to demolish the home and sell the land at a higher price on its own.

Capital Gains Exclusion

Eventually, you will sell your home. When you do, the law allows you to keep the profits and pay no capital gains taxes. Well, not necessarily all the profits. There’s a tax-free profit of up to $250,000 for single homeowners and $500,000 for married couples. This is for your main residence only—not for a second home or vacation property.

There are a few requirements you need to meet in order to qualify for this exclusion. You must own the home for at least two years—24 months—within the last five years up to the closing date. The residence requirement dictates that you should have lived in the home for at least 730 days, or two years, during the five-year period leading up to the sale. The final requirement, the look-back requirement, outlines that you didn’t profit from selling another primary residence during the two-year period leading up to the most recent sale.

Tax Deductions

After appreciation, the benefit of homeownership that is cited most often is tax deductions or savings. When you buy a home, you can deduct some of the expenses of owning that home from the taxes you pay to the government. This includes mortgage interest on both your principal residence and a second home, which can amount to thousands of dollars per year.

Interest on home-equity loans or home-equity lines of credit (HELOCs) is also deductible if the funds are used to substantially improve your home.

You can also deduct up to $10,000 in state and local taxes (SALT), including property taxes.

Home equity represents the difference between how much you still owe on your mortgage and the market price or value of your home. Home equity and appreciation may be considered together. As noted above, your home is likely to grow in market value over time. Your equity also grows as you pay down your mortgage, with less of your payment going toward interest and more toward lowering the balance on your loan.

Building equity does take some time because it takes time to lower the principal balance owing on the mortgage loan—unless, of course, you make a large down payment or regular prepayments. One thing to keep in mind, though, is that the length of time you have your home is a big factor in how much equity you build and the appreciation you can realize. The longer you keep it, the more equity you obtain.

As you pay down your mortgage and reduce the amount you owe, without realizing it, you are saving as the value of your home is increasing—just as the value of savings account increases with interest. When you sell, you will likely get back every dollar you paid out and more, assuming you stay in your house long enough. Over time the average 6% return (interest rate) on your savings should more than
cover your outlay.

Another plus: Home equity provides flexibility to get a loan that is tied to the amount of your home equity. Many investors follow their home equity and home appreciation simultaneously. If an investor believes their home value is greatly appreciating they may put off a home equity loan to have a better opportunity to realize seller’s appreciation.

Cons:

Illiquidity

Unlike stock, which can be sold within a matter of days, homes typically take much longer to unload. The fact that you may have access to $500,000 in tax-free capital gains doesn’t mean you have ready access. Meanwhile, you still must make mortgage payments and maintain the house until you sell it.

High Upfront Costs

The cost of investing in a home can be high—there’s more to your expenses than the property’s selling price and the interest rate on your mortgage. For starters, you can expect to pay anywhere from 2% to 5% of the purchase price in closing costs. Some of the most common closing costs include an application fee, appraisal fee, attorney fees, property taxes, mortgage insurance, home inspection, first-year homeowner’s insurance premium, title search, title insurance, points (prepaid interest), origination fee, recording fees, and survey fee.

Experts say you should plan to stay in your house at least five years to recover those costs.

Pride and Financial Responsibilities

One often-cited benefit of homeownership is the knowledge that you own your little corner of the world. You can customize your house, remodel, paint, and decorate without the need to get permission from a landlord.

Ownership comes with responsibilities, however. You must pay your mortgage or risk losing your home and the equity you’ve built. Maintenance and upkeep are your responsibility. You can’t call the landlord at 2 a.m. to have a leaky water pipe repaired. If the roof is damaged, you must repair it—or have it repaired—yourself. Lawn mowing, snow removal, homeowners insurance, and liability insurance all fall on you.

Potential Depreciation

Not all homes grow in value. The housing crisis of 2008 resulted in many homeowners being underwater, which means owing more on your mortgage than your home is worth. It doesn’t take a housing crisis for home prices to stagnate or drop. Regional or local economic conditions can result in home values that don’t keep up with inflation.

Remember, as well, that the actual structure you live in will depreciate over time. This can be due to wear and tear on the property, or a lack of maintenance and repairs.

The Bottom Line

A home is an investment that comes with many investment benefits but also risks, which makes it an investment that is not for everyone. Weighing the investment benefits against the risks is important. A rational comparison of pros and cons can help you decide whether to put your money into a home investment or potentially find better returns elsewhere.

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Is Owning a Home the Right Choice?