Finance & Enjoyment Blog

Home Ownership Ain't What It Used To Be

I was in my mid-twenties when my parents paid off the mortgage on their house. This was a momentous event in their lives, and I didn't realize the full impact until years later. They built the home and paid for it with a 20-year mortgage. The value of the house as well as their salaries had increased several times during the 20 years they were paying down the mortgage. The income tax savings from deductions for interest and taxes were significant, and more than made up for the difference between what they would have paid for rent and the monthly PITI payments.

I didn't realize until years later how significant this was in their financial picture. They now had an asset of significant value with no debt against it. They were able to retire in a beautiful home and just pay the insurance and taxes. They knew they could sell the home and have money to draw from as part of their retirement.

The old standard was to buy a starter home, live in it for a few years, reap the proceeds of a home that had increased in value while the debt was being reduced, and use the gains to upgrade to a larger, nicer home. Some people advocated doing that every 5 years or so to build equity.

We can't rely on that appreciation any more. In today's market there is no reasonable anticipation that home values will increase more than the cost of ownership. With interest rates as low as they are now, the income tax benefits are not nearly as significant as they used to be. In fact, the interest and taxes may not exceed the standard deduction you are allowed, so it may provide minimal benefit. When you add utility bills, repairs and maintenance, and other monthly costs, it is hard to buy a home with monthly payments, net of the reduction in taxes, for less than you would pay for rent. In addition, many homes, particularly town homes and condominiums, have homeowners' association dues that make the monthly costs really hard to carry.

Planning in this environment means looking at your total monthly outlays, net of any potential tax benefit. Do not plan on appreciation in value to overtake to amount you will be out-of-pocket.

Posted in Your Financial House »

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