Pros and Cons of Homeownership

Homeownership is sold as the American dream. It’s sold as emotion, not as an actual analysis.This is where you’ll raise your kids, grill in your backyard, make memories.The house isn’t a house, it’s a home, and it’s “yours.”I fell for it.

This is repeated so often people become fixated on it, the sentiment toward homeownership among current young people is that they’ll never be able to afford a home, as if that’s the only metric of a successful life.

The social reinforcement for homeownership is strong.“When are you buying a house?” comes up all the time once you hit adulthood.When you start looking, everyone has advice, it facilitates social relationships, conversations, reciprocity.Purchasing a house comes with even more social reinforcement – congratulations, housewarming parties, gifts, talk of renovation and “making it your own.”

I’ve been on every side of this equation – renter, homeowner, landlord.Each one has pros and cons, and homeownership is not the end-all be-all that it’s cracked up to be.

First, let’s talk about the mortgage.Much like anything purchased with debt, it’s not about what you can actually afford, it’s “what do you want your monthly payment to look like?”The lender gives you a few estimates, then once you actually buy the house you get a firm number.But that’s not the whole truth.The mortgage is made up of four parts – Principal, Interest, Taxes, and Insurance – PITI.If you have less than 20% loan to value, you also have private mortgage insurance (PMI), which adds an additional cost onto your loan.

Principal and interest don’t change over the life of your loan, that part is true.What does change, annually, is your taxes and insurance.The change is almost always positive – taxes and insurance go up nearly every year.When I purchased my house, my initial mortgage was somewhere around $1350.Then it went up $100 per month the next year.Then we refinanced to get into those historically low rates. It is not lost on me that I’m extremely lucky to have a 3.5% loan – however I also can’t really afford to leave either.I have the thing most adult Americans want, but I’m trapped here.

In the 8 years I’ve been here, my mortgage payment has fluctuated from $1150 all the way up to $1600 per month, because taxes and insurance are not stable.Your first year of monthly payments are about guaranteed to move upward.If you purchased a home that stretches your budget in year 1, I have bad news for you beginning in year 2.The letter that comes saying “pay us the escrow shortage or your monthly payment goes up” is confusing for a novice homebuyer.The bank can’t get their shit figured out, but you’re responsible for it.The congratulations you earned from your friends and family at purchase are long gone by the time this letter shows up.

Second, repairs and maintenance. As a renter, these expenses are covered by your landlord, your rent over time helps to pay for these repairs, along with the rent that’s been collected before you, but it’s stable. I’m not blind to the fact that rent typically goes up every year, but it’s generally predictable and consistent.The mortgage payment isn’t.

I purchased my home, and literally one month into homeownership my water heater died.Luckily for me, this was $600, a trip to the orange store, and a few hours of my time to replace.For people without those skills, this is a $4000 fix (I got at least two quotes).Same thing happened at one of my rentals shortly after acquisition.Cost me $1000, a few hours and a little help.What did it cost my tenant?Nothing more than the rent we’d agreed on a few months prior. It’s almost a law of the universe – big acquisition will be met with a big repair shortly into occupancy.I hope you’re prepared for it, but most people end up draining their savings cushion on the downpayment like I did.

Third: General upkeep. Homes age; they may become aesthetically unpleasant for some (even if they remain functional).Cabinet hinges give out, pipes develop pinholes and start leaking, the screen door handle breaks, the toilet stack stops working.These $5+ repairs add up over time.First, you need to go to the hardware store, get the part you need, then make the fix. It’s more annoying than anything, but this is your home, so you fix it.These costs have no schedule, they’re not included into any mortgage estimate. Social reinforcement can show up here too, you want your hinges to match, so what becomes replacing one hinge becomes a slight facelift for your whole kitchen so that everything matches, a $5 fix becomes $150 real quick.“Looks good, doesn’t it?” as your wife kisses your cheek, “look at my handy man!”

Finally, long term updates.These are very expensive.Remodels, new roofs, things you only purchase once, but they’re big.Often unaffordable, so most people apply for more debt, often using their own home as the leverage to update their own home. Now you have your general mortgage payment, plus your HELOC.

Worse, sometimes the city may assess your portion of the public sidewalk, decide it needs repair, then charge you upwards of $2500 for them to fix it.Sure, you can call and get some quotes if you don’t know how to do concrete, but they range from “just let the city do it” to “we don’t do jobs less than $4k.”I let the city do it.

Here’s the math. You have a household income of say $75 grand per year, and let’s say this amounts to roughly $4800 take home per month. You’ve been renting a place the last 8 years for about $1900 all-in, including utilities. You just purchased a home for $250,000, the bank is giving you a monthly payment of $2300 over a 30 year loan.Already almost half of your take home pay, that’s a $400 increase in your basic living, plus with the home you’ll have utilities on top of that, along with any of the maintenance and repair costs I’ve already reviewed.Let’s add about $400 in utilities, which I find a reasonable estimate, and an additional $200 per month (on average) for repairs and maintenance (roughly 1% of purchase price).Now, your basic living expenses, just to own the home, are about $2900. You’ve traded a $1900 ceiling for a $2900 floor.

Let’s look at opportunity cost – if you had a magic ball and knew about all this 8 years ago, you could have been spending $2300 already – 1900 in rent plus 400 invested into a broad market index fund.Using historical averages of about 8%, you’d have about $53,000 invested.If you invested the additional $1000, you’d have $133,000 invested.If you did nothing from here, in 20 years that $133k would grow to over $620,000.If you kept up a $500 investing pace, over 20 years you’d be at $906,000. You’re nearly a millionaire without owning a home. So what does success look like to you?Struggling month over month to pay your basic living?Or building toward true wealth in a home you rent?Is that worth a million dollars?Let’s dive deeper.

“But my home goes up in value!”Yep, sure does.And the only way to access its value is either through selling it or taking on more debt.Your HELOC is typically at a higher interest rate than your mortgage (I have one, no balance, but rate is currently at 7.45%).Selling your home includes all sorts of costs, most buyers want some concessions, repairs, updates, etc.Let’s run another example!

I purchased my home in 2018 for $160,000. Today, estimated worth is somewhere around $300,000 – it’s almost doubled in value!Excellent, but with that comes increased taxes. My tax bill at purchase was around $3300 per year, it’s now about $5500 per year.Increased value also means increased insurance costs because it would be more to replace the home in the event of a catastrophe.
HELOC: You can typically take out up to 80% LTV minus your mortgage balance.

·My current mortgage balance is about $148k

·80% of 300k is 240k

·240k – 148k is 92k.

·Theoretically I’m eligible for about $92,000 in additional debt based on my numbers.I don’t like debt.Debt is chains.

Sell: First things first, just because it’s “estimated” at 300k doesn’t mean that’s what it would actually sell for, the market is an untamable beast.But let’s say it sells for 300.This is a useful analysis because people statistically stay in their first homes for about 5-10 years, I’m at 8 right now.

·300k – 148k = 152k in net earnings

·Real Estate seller commission at 5% = 15k

·3% more in standard closing costs = 9k

·Plus any repairs, concessions, etc. agreed upon as part of the sale, let’s call it another 3% or 9k.

·So, my 152k (tax free!) proceeds is cut down by 15k, 9k, and another 9k, meaning I’d walk away with about $120,000.That’s also a gross number, because it doesn’t add up all of the repairs I’ve paid out of pocket, the big ones include a bathroom remodel (6k), new sidewalk (2500), basement remodel (4k), and new windows (13k), plus a new roof that cost me $8000 out of pocket because my homeowner’s insurance company was terrible (you are not in good hands).That’s over 30 grand in major renovations I’ve made, and we’re basically at the same place numerically as the HELOC.I could sell my house and walk away with 90 grand in profit, or I could borrow 90 grand as a HELOC and pay interest on it. One isn’t better, they both create their own unique problems.

With that 120k, I’d have to find another place to live, meaning either purchasing another home and using that as the downpayment or finding a rental.I’ve traded one problem for another, I haven’t actually improved my situation.

Homeownership isn’t bad. But it isn’t all that good either. You need a place to live, there’s no question there.The important thing to consider is whether you own your home, or if your home owns you.