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A New Home

These days, a purchase of a house isn’t only a financial investment, it’s an emotional bonding too.

Should You Own?

Many people dream of buying a home. Sometimes, home ownership is a great idea. It’s certainly a central idea of the classic American Dream: a parcel of land to call your own, and live the way you want. But in the 21st century, that’s not always a hard-and-fast benefit. If you’re urban and like to move around a lot, then maybe renting is more your speed. If you’re ready to have your own patch of green with a barbecue in the back yard surrounded by a little white picket fence, then maybe it’s time to start planning.

Planning a Purchase

If owning a home is a good match with your needs and lifestyle, then you should design a financial plan to achieve it. When you’re planning a house purchase, examine your goals. Don’t view a house primarily as an investment. Historically, residential houses appreciate only 1 percent faster than inflation (for comparison’s sake, stocks have appreciated closer to 8 percent over inflation in the same length time period). Home ownership has two advantages that can help offset the lower rate of return—mortgage interest fees are tax deductible, and when you take out a mortgage you increase your exposure to risk.

How Do Mortgages Work?

Typically, purchasers put up about 20 percent of the cost of the home as a down payment, but are responsible for the entire increase or decrease of value. This can work both for and against the owner. If housing value decreases, owners might find themselves owing more than the value their house had at purchase. If the market is strong and values increase, then owners are in a position of owning virtual wealth—that is, they probably will make money on a sale of their home. In a down market, homeowners’ mobility is limited, since it’s more difficult to sell. But when prices increase, homeowners can generate income by selling the home and moving to a cheaper home or renting for less than their mortgage. If you plan to stay in your location for many years, have a stable job and prices in your area make owning preferable to renting, then you may prefer the stability of owning your home. If you think you may move in the next few years, then the flexibility of renting might be best.

A Note on Real Estate Agents

It is important to know that most real estate agents work on commission, meaning they make more money if you buy a house that costs more. Their interests aren’t the same as yours. Be aware of this dynamic. If you feel an agent isn’t focused on your interests or is encouraging you to spend more on a house than you planned on, you’re not tied to the relationship. Look for a new agent.

Trading Up?

The most important thing to remember: don’t buy more house than you can comfortably afford. This might mean living in a more modest home, possibly even renting while you save up for a larger down payment. Don’t feel rushed into buying a home—that kind of pressure leads to a decision you might regret. In fact, when you need to find housing pronto, it can be prudent to rent for a few months or even a year as you gauge neighborhoods and determine what will fit best with your life.

Sometimes, home ownership is a great idea. Other times, not so much. Renting can actually work in your favor!

Check your numbers against this New York Times interactive. It’ll generate a line graph showing the point at which renting stops working for you.

Other links of interest:

Why You Shouldn't Keep a Mortgage Just for the Tax Deduction

Does It Still Make Sense to Refinance in Today's Market?

Buying a Home (at HUD)

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