The Benefits of owning a home, aye? Well, really we are going to go into the benefits and negatives of owning a home to make sure we truly cover everything for you in your home buying educational enlightenment. Yes, I used enlightenment. This could be most people’s educational series that creates a renaissance in their brain about the process of buying a home, and what they should really understand. Is renaissance too strong of a word? Probably. Am I going to use it anyway because I like to sound super smart and I want to spice up this blog post? You betcha.

Let us begin the renaissance of brain knowledge for you. First, though, I’m going to lead with telling you to be cautious. Sorry for the negative Nancy start to the blog series.

If you read most blogs and online articles, they absolutely rave about the benefits of owning a home. Usually you will see articles like “The Ten Biggest Benefits of Owning a Home” or some other standard list of clickbait just to have a catchy title to get you to read (by the way, I will write some of those also. They still are a little bit helpful, at times). If we are going to provide you the “Detailed Home buyer Guide” blog series, we need to make sure we are addressing the pro’s and the con’s because not everyone should own a home during their lifetime, and for those that can and should, you will have specific times during your life that owning is the most advantageous (and times where you are better off renting).

Now, does that mean I am saying YOU should not strive to be a homeowner? Of course not, what do I look like, some kind of barbarian?

What I am saying is home buying and home ownership, just like any major financial purchase, can be a wonderful financial and personal growth opportunity, or it could put you into foreclosure or bankruptcy if you go about it unprepared. So, let us cover our basis here and go through the reasons you should purchase and situations where maybe you should strengthen your personal or financial life first.

ACTUAL Reasons to Purchase A Home:

1. You are financially stable and strong: There is nothing wrong with renting, but we all know the old adage that when you rent you are just paying someone else’s mortgage. Though that is often true, you need to understand that switching to owning a home does not mean you immediately are in a better financial situation. Most of the time, owning a home is quite a bit more costly on a monthly and annual basis than renting, and it comes with a considerably larger time commitment to maintain and update the property. If you are going to purchase a home, you should make sure you are set on a few basic things in your life, such as:
   • You are comfortable with the monthly payment of the mortgage – many people come in thinking they can purchase a home that has the same monthly payment as their rent. This may be true (depending on where you live, the property you are trying to purchase, etc.), but for the majority of Americans, once you add in the property taxes, the homeowner’s insurance, the principle and interest payments, the mortgage insurance costs, homeowner’s association dues, and other costs, your mortgage payment will be higher than what rent would have been. If you are transitioning from renting to buying, you need to make sure your monthly budget can sustain a decent increase to your housing expenses, now and for the foreseeable future.
   • Your Income is stable or increasing – if your mortgage payment is potentially going to be higher than your rent, one major factor you should have in your thinking is the likelihood of your income to continue or increase. If there is any risk of you losing your job, having your hours at work cut, having your commission income drop substantially, and so on, you need to consider if those risks could cause you issues in making your mortgage payment. With missing payments in rent or a mortgage, you can be kicked out of the residence and have your credit, etc. affected. But, if the mortgage payment is going to be higher than your rent payment, it can lead to higher likelihoods of these issues occurring. Please think ahead on you future income and its likelihood to continue.
   • You have a strong savings built up and are comfortable with the out of pocket costs to purchase – Yes with rent you usually have to put down a deposit and possibly an application fee, so you have out of pocket costs to get into the property. But with a mortgage, those out of pocket costs can be down payments, lender fees, appraiser fees, title company or closing attorney fees, recording and credit report fees, home inspection costs, earnest money deposits, possible realtor fees (commissions and admin costs), utility company set up costs, homeowner’s insurance and property tax escrow set up deposits, and more. If you are in a position where you do not have a good savings safety-net established, you likely will want to build that up before looking at buying a home. Yes, there are ways to buy a home with no cash to the closing table, but that does not mean you having very little money in the bank is every going to be smart while you buy or own a home.
   • You are comfortable with the costs to maintain the home – though updating your home and taking care of your home can be one of the joys of owning a home (it does give most people pride, at least, when they make their properties nicer than they were before), you need to already have a plan for how much it will cost you to own the home and care for it. Most “experts” are going to tell you to budget for 1% to 4% of your home’s value in repair costs each year. For example reading, check out Bob Vila’s article – https://www.bobvila.com/articles/how-much-to-budget-for-home-maintenance/. I tend to tell people to plan for $150.00 to $250.00 a month in basic upkeep costs (yard maintenance, furnace filters, water filters, cleaning supplies) and to plan for major expenses (new water heater, insurance deductible for insurance claims, water leaking somewhere it is not supposed to) every couple years. Major expenses can obviously vary in cost, but I mentally plan for a $1500 bill every two to three years. If you want to budget that amount out monthly, good choice and feel free, but either way you need to plan for those pieces.
2. You are emotionally and personally in a stable position: There are very few things that can derail your life (and then your finances along with it) easier than having volatility in your personal life. Having a relationships end, a midlife crises, etc. can not only cause you emotional havoc, but may then cause you to lose stability in your living situation. One of the worst times to sell a home is when you HAVE TO sell it. Whether due to divorce, or whatever it is, this can make a tough situation even worse, especially if you have to sell the home for less than it is worth just to get the sale done quickly. Outside of making sure your finances are in order, making sure you will have stability in your personal life, to the best of your ability, is very important. Obviously, you cannot control every life event, but if there is any likelihood of turmoil in your personal life, it is probably best to rent for a while to get through it.

Ok, that was a lot of doom and gloom conversations to start with. I am sure you did not start reading this blog post series because you wanted to feel depressed, and I 100% agree. But, if you are not ready to buy a home (whether financially or personally), please do not try to force a home purchase on yourself. These (above) are the actual reasons you can feel comfortable buying a home. You should not buy a home because it gives you butterflies that tickle your tum-tums. Yes, buying a home is and should be an exciting part of your life, but please do not put the cart in front of the horse. The horse is likely to just run you over in that scenario.

FUN BENEFITS OF OWNING A HOME!

ALLLLLLLLLLLRRRRRRRRRRRRRRIIIIIIIIIIIIIIIIIIIIGGGGGGGGGGGGGGHHHHHHHHHHHHHHHHTTTTTTTTTTTTTYYYYYYYYYYYY!!!!!!!!! On to the fun benefits. Once you know not to be stupid, you can look at the big picture of owning a home.

Let’s start with talking about some of the basics:

1. IT IS YOUR FREAKING HOME! – This one might be obvious, but it is the most discussed aspect of home ownership, and it should be. If you own the home (just remember, if you have a mortgage, the mortgage company owns it too, within their rights) you can treat the property as your own. This does not mean you can store hazardous waste, make drugs in the home, or do other activities that would not be looked at kindly by legal authorities. But it does mean you have wide flexibility in making the home yours. If you want to paint rooms, add fans, change window coverings, update flooring or cabinets, or add on to the property, you most likely can. Maybe you are a Halloween or Christmas weirdo and want to go crazy decorating for the holiday festivities. Maybe you just like to host dinners or barbecues and want to deck out your grill and cooking accessories. Make the home your own and take pride in the work you do to the property to make it better.
2. You have a new community around you – One of the aspects that people almost never talk about when discussing home ownership is the community. You now have new neighbors, many of whom are also likely homeowners, that can be great new friends to connect with. You already have multiple things in common (you live in that neighborhood/town and you own a home) and likely will be going through some of the same problems and benefits with your homes. Making friends with your new community can lead to many great enjoyments (such as more life experiences and connections) and can also help you develop people who would help you fix up your home, lend you some tools, or give you advice. Not that you cannot build a similar community while you are renting, but having the connection of home ownership and the nuances that accompany it can connect people in unique ways. Even if it just leads to you occasionally having a drink in their garage so you can complain about the hooligans living down the street, it still creates new dynamics.
3. You have opportunities for new financial benefits – while we discussed the possibly higher costs that come with home ownership in the sections above, there are financial benefits that come with the ownership of the property as well (or there can be, IF YOU CAN AFFORD THE HOME AND PAYMENT). The four biggest are gaining equity from paying down the mortgage, gaining equity from appreciation, gaining equity from improvements, and your payment not increasing at the same speed as rent. Let’s start jumping in:
   • Payment increases slower – As mentioned above, rent in most areas around the country is currently less than the average mortgage payment in those same areas. But on the flip side, your rent payment can go up every year for perpetuity. Most lease agreements are for 12 months or less and rent inflation is a real thing. If you have a fixed rate mortgage on the other hand, a large portion of your payment stays the same. The “fixed” component of the fixed rate mortgage means your interest rate does not change and, when amortized over the term, allows your principle and interest payment to never vary (until you refinance or sell). If you have a $2000 mortgage payment, it is likely somewhere around 75% of that payment is your principle and interest portion (normal 30 year mortgage example). That portion, or in this example – $1500, would remain fixed while everyone else’s rent increases over the next 10, 20, 30 years. Now, the total payment is not fixed because your homeowner’s insurance costs, property taxes, and other portions of your payment can change over time. But luckily, that still has your total payment increase less than rents over time, traditionally. Just think, if you kept this home for 20 years, and the only increases to payment have been with property taxes and homeowner’s insurance, how much less are you paying in your payment 20 years from now in comparison to having rent go up every year over that period. News flash, if you were paying $600 a month in rent 20 years ago, you are likely not paying that amount now.
   • Equity gain from making your mortgage payments – Though this is often not quite as cool as equity gain in other ways, each month that you make your mortgage payment, a portion of the payment goes towards the principle balance that you are paying off. Sadly, if you have a 30 year term mortgage (which most people do) and you are only making your minimum payment (which many people are) then the amount of your payment that initially goes toward principle is quite low. For a quick example, let’s say you have a $350,000 home you purchased. You put 5% down, had a 6 percent interest rate that was fixed for 30 years, had mortgage insurance costs of $97 a month, homeowner’s insurance costs of $135 a month, and property taxes of $275 a month. That would give you a total payment of just over $2500 a month. The amount of your payment going towards principle in the first month of the mortgage payment would be $331.01, which is a little more than 13% of your total payment. So, 13% of your payment is going towards lowering what you owe and building you equity in that first month. Not great. But, regardless, your loan is getting paid down, you are building more equity in the property each month, and you can always put more money towards principle faster, if you so choose (which is recommended).
   • Equity gain from appreciation – This portion of the equity gain discussion is always a little bit more exciting. That is largely because you can see bigger numbers, and faster. Home appreciation is the increase of value of your property over time. Like other assets, real estate is highly sought after and a finite resource. The more people who occupy the planet, the more that want to own property and since we cannot create an infinite supply, the value of property increases (as long as the local area is still growing in population and the property itself is kept up). If you want to tinker with numbers for your area, I would recommend using the FHFA website that helps you calculate home appreciate over the last number of years (back to around 1991). Here is the website House Price Index through FHFA. Just plug in your state and locality, plug in the years you want examples of, and enjoy. To help with a quick visual on this blog post, if someone bought a home back in the first quarter of 1992 for $75,000 (which was a decent home back then) and lived in South Dakota (where Midwest Money Mentor resides), that average price point property would now be worth just shy of $338,000 (on average, in South Dakota, at the end of quarter 2 of 2024). That would mean the property grew in value around $263,000 in that little over 31 year period (in South Dakota, on average, as of this writing). Other areas of the country grew faster or slower, so make sure to check out the areas you are in. The other nice benefit with that timing, is even if you paid the minimum payment on your mortgage, the property should be paid off in that 31 year period, so you would be sitting with a the full value ($338,000) of equity in that scenario, because you should have no mortgage as well.
   • Equity gain from updates – finally, as we discussed before, you can also improve the value of the property by updating the home, adding garage space, adding more livable (finished) square feet to the property, and more. Though not every update you do to the home is going to give you a dollar for dollar increase in the home’s value, anything you can do to make your living experience better while you are in the home, is also, likely, going to increase the desirability of the home to a potential buyer. Often titled “sweat equity”, if you update the property to increase the value of the home substantially, pay down your mortgage over time, and enjoy the natural appreciation that your market has to home values, you can see significant wealth increase over time. We, again, want to make sure you are financially in a strong position to cover the costs of these upgrades, along with your monthly payments and other repairs that will inevitably pop up. But once you are in a strong financial position to do so, you can improve your wealth nicely with home ownership.

There is still a million more discussion points around positives and negatives for purchasing your own home. We are sure as heck not going to cover all of those here. I do not know about you, but I do not have the patience or the attention span to plug all of it into this one post. All in all, you need to understand that purchasing a home is a very personal decision, and you need to weight the best options for yourself. For now, we will continue on with the detailed series and you can check out part 2 here, which jumps into mortgage options when buying a home –