Are you thinking of buying your first home? Becoming a homeowner can be an exciting, rewarding prospect, but it’s not without risks. Here are some of the benefits and drawbacks of homeownership.
Benefit: You’re No Longer a Renter
Sick of dealing with a landlord? When you’re a renter, you can find yourself facing rent increases, repair needs that aren’t being addressed, and strict rules about what you can and can’t do in your apartment. If you’re not in a rent-stabilized unit, your landlord can refuse to renew your lease, forcing you to find a new place to live.
As a homeowner, you are in control of your living space. Your mortgage payments are typically the same every month, which means you can plan your finances and spending accordingly. You can paint your walls flamingo pink, if you’d like, and have pets (though you’ll still need to follow any rules set by your homeowners association, if you have one, or your management or board if you live in a coop or a condo).
Risk: You’re No Longer a Renter
When you’re a renter, if something goes wrong in your apartment, the landlord is responsible. As a homeowner, all the responsibility falls on you. You’ll need to get acquainted with the basic duties of homeownership, like keeping your heating, plumbing, and electrical systems in good shape, clearing your gutters, shoveling your sidewalk, and getting the trash out on time.
And when something goes wrong (and something always goes wrong), you’re going to have to deal with it. Say a pipe breaks: you’ll need to hire a plumber to repair your pipes, plus you’ll have to deal with any resulting damage. You’ll also be on the hook with the City to pay for any increased water usage in your bill. These costs can pile up.
You’ll also want to make sure you’re insured if disaster strikes. Your homeowners insurance will cover things like fire and personal liability if someone is injured on your property. Depending on your neighborhood, you may also want to purchase flood insurance.
Benefit: You Can Make Money
Being a homeowner has many positive financial advantages. First, it allows you to build wealth. As you make mortgage payments each month, you increase your home equity, which is the amount your home is worth minus how much you owe on it.
Second, your home may become worth more over time. Many New Yorkers who bought homes in neighborhoods with lower home prices have now seen their neighborhoods become “hot,” causing prices to soar. You can also increase the value of your home by investing in renovations and home improvements.
Finally, owning a home comes with certain tax benefits. You can deduct the interest paid on your mortgage from your taxes, as well as any local property taxes paid on your home. The 2017 tax reform made it less beneficial to own a home, though, by limiting the state and local tax deduction to $10,000 per household, and by increasing the standard deduction so fewer taxpayers will itemize their taxes and take advantage of these deductions. Finally, the tax bill limits the amount of interest you can deduct to the interest on the first $750,000 of your mortgage.
Risk: You Can Lose Money
As we learned in 2008 financial crisis, home prices can also go down. After the housing market collapsed, many homeowners found themselves underwater, meaning that they owed more on their home than it was worth. Unfortunately, underwater homeowners have few options: they can take a loss on their home, losing some or all of the the investment they put into the home, or wait and hope the market will improve.
Homeownership can also be a financial burden if your personal circumstances change. Say you lose your job, have your hours reduced, or need to move to a new city quickly. You might be stuck making mortgage payments for a house you no longer live in, or face the prospect of losing your home to foreclosure.
Buying a home is a long term investment, and a housing counselor can help you evaluate the benefits and risks. Find a housing counselor in New York by calling the Center’s Homeowner Hub by clicking the link or by calling 646-786-0888.