Homeownership can undoubtedly help you increase your net worth over time. In fact, according to older census data, home equity and retirement accounts combined accounted for more than 60% of the typical household's wealth. And those who owned rather than rented had a median net worth more than 80 times greater than the median for renters.
Now, some of the disparity can likely be attributed to the fact people are more likely to buy property if their financial life is already more secure. That's because a stable job and good credit are prerequisites for purchasing. But, there's no question that when your monthly housing payment goes to help you build equity and acquire a valuable asset, the impact is usually positive.
Unfortunately, that doesn't mean buying a home is the right choice for everyone -- or even that all homeowners will end up better off financially. Whether buying a property helps you build wealth or turns out to be a big mistake depends on several factors -- including the following key issues.
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Are you financially ready for homeownership?
Buying a house when you aren't in a good financial position is unlikely to improve your situation and, in fact, could worsen things considerably.
Ownership comes with a host of expenses beyond just your mortgage, including maintenance and upkeep, repairs, property taxes, insurance, and potentially association fees. If you can't afford any of these expenses, or if paying your monthly housing costs prevents you from doing other important things including repaying high-interest debt, saving for retirement, or building an emergency fund, you could end up struggling to grow wealth over time.
Even worse, if you buy a home but become unable to make the payments because your income falls and you have no financial cushion, you could face foreclosure. This is a hugely expensive ordeal that will leave your credit in bad shape and your financial life in dire straits.
You don't want to take a chance of this happening, so make sure you have a stable job and several months of emergency money saved before making your purchase.
Did you buy the right property?
The specific details of the property you buy will also impact whether homeownership helps you build wealth or not. If you purchase a home that's not worth nearly what you paid for it or that doesn't hold its value, you could end up owing more than it's worth. This hurts, rather than helps, your wealth-building efforts.
To make sure you don't end up in a home that's considered a lemon in the real estate world, work with a trusted real estate agent who can provide insight into your purchase. Compare the property's price to comparable homes and pay attention to issues affecting resale value, such as the school district or whether any zoning changes are imminent.
Will you remain in the home over the long term?
If you plan to stay in a home for a long period of time, there's a better chance you'll be able to build wealth by buying it.
You won't incur repeated high transaction costs associated with frequent buying and selling. And if you happen to make a profit, you can exclude some or all of it from capital gains taxes or will be taxed at a lower rate. And over time, you'll build more equity -- thus a larger ownership stake -- and the property will be more likely to go up in value.
If, on the other hand, you anticipate moving quickly, you may not be able to make up the closing costs and other fees associated with property appreciation. This means you could end up having to pay some money out of pocket to walk away from the asset.
Did you qualify for an affordable mortgage that you can easily repay?
Finally, the type of mortgage matters as well. Mortgages generally offer low interest that's tax deductible for those who itemize. This can make the debt you take on very affordable relative to what the home may someday be worth.
But if you qualify only for a very-high-interest loan, or you opt for a confusing mortgage -- such as an adjustable rate mortgage or interest-only mortgage that could end up seeing sharply rising payments -- you could become unable to cover the monthly bills and risk losing your property.
You don't want to regret your home purchase, so make sure you ask yourself these four questions before you decide if moving forward with offering to buy a home is the right choice to help you build wealth.
