What You Should Know About Owning a Home

Renting vs Owning

If you're looking for the best return on your money, historically you're better off investing in the stock market than buying a house. Primary homes generally don't earn the investment return of, say, mutual funds. While the stock market's long-term average rate of return is in the range of 8%-10%, housing has historically appreciated in the low- to mid-single digits. But while you shouldn’t buy a home solely as an investment, you do have to live somewhere.

When you own your home, Uncle Sam helps out by letting you deduct part of the mortgage interest and real estate taxes each year. Borrowers get the benefit only if they pay enough in one year to exceed the standard deduction. But that usually happens, especially during the first few years of a mortgage when most of each payment goes toward interest rather than principal.

The Pros of Owning a Home

Owners enjoy other benefits besides tax breaks. They build equity over time as their home value rises and their mortgage balance shrinks. They also don't have to worry about their housing costs shooting through the roof like they can with rent increases. Unless your mortgage is adjustable, you always know your payment.

The Cons of Owning a Home

When something breaks at an apartment, it's the landlord's problem. When it's your name on the deed, the problem is yours. If you throw every penny into a down payment, you're taking a big risk because you may not have enough money left to fix leaky pipes or buy a new air conditioner.

Potential buyers might want to hold off for other reasons. If there's a good chance that your employment status will change soon, you might want to wait. The same goes for people who plan to change jobs. The monthly payment isn't the only obstacle for this kind of customer. Closing costs and other home-buying fees, as well as the commission that most owners end up paying to real estate agents when they sell their homes, add up. People who have to sell after living in one place for only a short time can end up in the hole on their investments.

Explore all the options

Some middle-ground approaches to homeownership blend elements of buying and renting. Some of the more popular loan types are seller financing and “lease with an option to buy” and "contract for a deed" plans.

Seller financing

In seller financing, the buyer buys a $150,000 home by taking out an $80,000 bank loan, putting $10,000 down and getting the seller to "carry back" a $20,000 second mortgage. The buyer makes payments on the first loan to the bank and the second loan to the seller. That second mortgage from the seller usually comes with a higher rate, a shorter term, and a potential balloon payment. Or, the seller can hold the entire mortgage and the buyer makes payments directly to the seller.
- Pro: It reduces the cash needed to get into a home and could reduce closing costs.
- Con: There are two monthly mortgage payments, and the seller determines the interest rate for the second loan.