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.
"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.