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5 Home Ownership Myths to Avoid

July 14, 2010 RSS Feed Print

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Popular financial advice changes direction fast when a market experiences historic declines over a short period. Several years ago, financial gurus focused their attention on real estate. The advice that sold the most books suggested buying as much real estate as possible, using as much of other people's money as possible.

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Many people who relied on debt for building a real estate empire are now suffering the consequences of over-extending their financial reach, but real estate investments are just one part of the tale. Some homeowners who relied on the same, mogul-based advice for buying their one and only home set their families up for financial disaster.

They believed the hype prevalent in the real estate market and decided to view their home as an investment. Perhaps chasing the American dream of home ownership, they weren't prepared for the reality. If you are considering the purchase of your first home, don't make the decision for the wrong reasons.

Avoid believing these home ownership myths:

"Your home is a good investment." Aside from recessions, there is a good chance your house will hold its value in the market over long periods of time, but it won't appreciate in value much more than the rate of inflation. Unless there is something special about your home, you probably won't get rich just by owning it. If you're not renting out a room or otherwise producing income with your house, it generates expenses like maintenance, insurance, and taxes. Good investments generate income, not expenses.

When you sell your house, you can't just subtract your purchase price from the sale price to determine how much money you earned through home ownership. Your "cost basis" includes any improvements you've done, all the maintenance expenses you've paid, and your tax bills, so you must subtract these amounts from your sale price as well. Any expense that you wouldn't have paid as a renter or through any other investment should be taken into account, and you'll likely find you haven't made as much money as you believe. Consider the true cost of buying and owning a home.

"I'll get a tax deduction." While the government provides a tax deduction for mortgage interest as well as other tax credits related to energy-efficient appliances and other green technologies, these benefits do not outweigh the expenses. Many homeowners find that even with the availability of a mortgage interest tax deduction, their tax return isn't affected because they are better off taking the standard deduction.

Even if you qualify for the maximum home buyer tax credit of $8,000, your tax benefits are unlikely to compare with the lower expenses renters experience.

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"Renting is throwing money away." In the early stages of paying a mortgage -- or if you opt for an interest-only mortgage -- there isn't a substantial financial difference between renting and owning a house. While renting, however, you have flexibility to move as needed without the expense and hassle of selling the home. You also have fewer expenses and responsibilities and your landlord takes care of maintenance, saving you effort as well as money.

"Home ownership encourages forced savings." As you pay off the principal of your mortgage, you are locking away cash into your net worth for safe-keeping. A problem arises when you want to access that cash. A true savings account earns you interest and is accessible at any time. The savings in your home can only be accessed by selling, refinancing, or taking out a loan or line of credit on the house. In the case of refinancing, many homeowners end up extending the length of their mortgage and paying more interest to the lender over time.

The best way to encourage forced savings is to open a high-yield savings account and contribute automatically with direct deposit or automated transfers.

"Renting is always the better choice." While finances play a strong role in an important and potentially expensive decision-making process, it shouldn't be the only factor. Although renting and investing your extra income in the stock market might have a financial benefit over paying a mortgage and expenses, many people may rent without making that additional investment. Run the numbers, but also consider what is right for you and your family at the time you need to make the decision.

Luke Landes writes for Consumerism Commentary, where he encourages discussions about money and consumer issues. Consumerism Commentary regularly tracks and reviews the best online savings accounts and other financial products.

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The true cost of your home? Multiply your sales price times 3. That's what you end up paying. It isn't the American dream, it's debt slavery.

Jason of VA 12:58PM June 02, 2012

I don't even know where to begin. Sure, the points are right, but they don't explain the context for which each point is valid. Yes, owning a home is expensive, so is renting an apartment of the same size for the rest of your life. If you want to compare home ownership to renting on a per month basis assuming that you want to relocate one year later when the lease expires, sure, owning a home is extremely expensive. If you want to own a home for the traditional reasons people want to own a home, there is no comparison to renting.
As a great example, I tracked the true cost of owning our first home down to the last penny using excruciating detail in Quicken to ensure I didn't miss a penny starting with all costs related to our initial searching for a home through the final end of selling it. I includes all costs including paint, repairs, HOA dues, mortgage costs, income tax benefits (I ran TurboTax twice each year, once with and without the house to see the delta), etc. We owned the home for 2.5 years, a duration even Realtors will tell you is a losing scenario because of the high cost to sell. Even in just 2.5 years our true monthly cost of ownership was better than renting. Of course, not by very much. It came down to being the same cost as a two bedroom apartment with a single carport in the same area and instead we got a three bedroom home with an attached two car garage. Here's the best part, this was in SoCal and it was during the downturn. So we didn't loose our shirts and we didn't make a mint.
Be cautious of these article that claim expertise but offer none.

The Dude of CA 8:17AM July 21, 2010

Most people think. Sadly, the government only posts foreclosure rates. But, many more homes are "lost" to divorce, selling at a loss and short sales. No one tracks these. But, easily, somewhere between 1/3 and 1/2 of all people will end up selling a home for much less than they wanted and before they originally planned to. Millions of people left the Detroit metro area in the last 30 years. Many sold their houses for small losses to modest gains. No one tracks these losses since they are always recorded in nominal numbers (excluding taxes paid, home updates and utlities) from municipal, county and state tax records. No one tracks these as losses. Millions of these people left to find better work, education opportunities or to escape the cold at retirement. Sadly, no one in America noticed until the foreclosure and unemployment rates shot up from 2005-2010. And, that is the risk MOST homeowners face. When your area changes, or you get divorced or your employment status changes you are often trapped. And, forced to sell at a loss or small nominal gain. Further, you are often in worse shape than when you purchased the home. Renting is a buffer against taht.

Archman X of MN 4:29AM July 18, 2010