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Why You Should Own Your Home.

Posted on | January 8, 2008 |

“I recommend that every man own the roof that sheltereth him and his.”

-Arkad, the Richest Man in Babylon.

Translation: Own your home and pay towards building equity for yourself instead of your landlord.

This is the 5th of the 7 cures for a lean purse as detailed in George S. Clason’s The Richest Man in Babylon.

Many times home ownership is touted as the only real choice when deciding rent or own your living quarters. But sometimes, it does make sense to rent instead of own. Usually for those who aren’t yet settled in any particular neighborhood, or who are job hoppers. But it also makes sense for retirees who’ve decided they either can’t keep up with the yard and house work, or who just plain don’t want to.

Still, for most people (especially families) who can afford the payments (mortgage, taxes, and interest) on their house with a 30 year fixed rate mortgage (or even better - a 15 year fixed rate mortgage) and who are planning to stay put for 5 years or more, the benefits far outweigh the downside.

So what are the pros and cons to home ownership?

Most people have heard of the financial benefits of home ownership. Things like: the mortgage interest and property taxes are deductible on your taxes, and that gains of up to 250k for individuals (500k for married couples) is tax-free (It used to be that it’d be tax-free only if you rolled the gains over to a new housing purchase within 2 years, but that restriction was lifted with the Taxpayer Relief Act of 1997 (certain restrictions still apply, such as having to be a primary residence for 2 of the last 5 years..)). This last one alone is HUGE for retirees who own their home outright.

Much has also been made of home equity loans, which is the ability to take out a loan on the appreciation of your home’s value, usually at a much lower rate than other loans. Home equity loans are also known as a 2nd mortgage, or home equity lines of credit.

But there are other intangible benefits to owning your own home as well as the financial. A 2006 USNews article highlights some of these benefits of home ownership. One of the items I found interesting was:

“The children of owners are more likely to graduate from high school than the children of renters. Owners’ daughters are also less likely to become teen mothers. Researchers are not sure why this is so, but Joseph Harkness, an associate research scientist at the Institute for Policy Studies at John Hopkins University, says one plausible reason is stability.”

This is not really surprising, but I never stopped to think about it. My wife and I did all of our relocating before our kids were born. Since then, we’ve stayed put. But I think it’s also more than just physical stability. I think there’s a large part of home ownership that’s representative of other facets of a person’s life. I think people who are home owners tend to have, on average, a better financial footing than renters. Partly because they had to get their finances in line to afford a home in the first place and partly because being a home owner typically forces you to pay more attention to things like utility bills, taxes, et cetera.

I know, some of you are jumping up and down with excited cries of, “But what about the sub-prime lender mess?! You can’t say that those homeowners had their finances in order!” That’s true, but it’s important to keep things in perspective. As of June, 2007, foreclosures in the United States were 1.28%. You read right. Less than 1 and a half percent of all outstanding residential mortgages. And mortgage delinquencies were less than %5. And many people who have adjustable rate mortgages have pursued mortgage refinancing. You can read about it here.

Another facet I found interesting was:

“It’s healthier. There is some evidence that homeowners report higher self-esteem and happiness than renters and even better physical health.”

This too makes sense. Home owners aren’t worried about the next rent hike, or if their landlord is ever going to get around to fixing the plumbing, or de-icing the walkway. Of course, home owners have other things to worry about such as: tax hikes and fixing their own plumbing.

But while they can be hassles, they can also be an empowering source of self-esteem and a gratifying sense of self-control and autonomy. In fact, in The Richest Man in Babylon, Arkad speaks of just such things as these intangibles like autonomy and self-esteem.

In summary:

Interest rates are still at historic lows but the recent run up in real estate makes it a lot harder to break into home ownership for those not already home owners. But I think that in the long run, if your life style is suited to being rooted in a specific neighborhood for more than 5 or 7 years and you can afford your monthly payments on a 30 year fixed rate mortgage, then you’ll be far better off than if you rented.

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