It is important to enter the household with the right mindset.
- You will often hear that a home is a good investment.
- While homes can add value over time, you might be better off considering that as an expense.
People are often advised to buy houses rather than rent because in the latter case, you pay the mortgage to the landlord. With the first one you pay yourself. And that means you can ultimately own your home entirely.
In addition, houses tend to appreciate in value over time. Of course, it may take several years or even decades before your house rises in price. But in most cases, if you buy a house and continue to live in it for 10 years or more, by the time you are going to sell it, you will be able to get more than you paid for it (except for a housing market crash). ).
But as much as some financial experts advise you to think of your home as an investment, you might be better off looking at it as an expense. That’s why.
You may not make money at all
Imagine that today you buy a house for $300,000 and in 30 years it will cost $600,000. On paper, it looks like you’ve doubled your money, which is good, right? Well, not so fast.
While you can expect a $300,000 return depending on the price of your home, that doesn’t mean you haven’t invested $300,000 or more in that home over those 30 years. In fact, think about all the expenses you’ve likely incurred during this time, from property taxes to maintenance and repairs. Chances are you have invested as much money, if not more, than you would have received by selling your house.
And let’s not forget mortgage interest. Mortgage lenders don’t make mortgages to be good. They do it to make money.
If, to buy this $300,000 property, you put in 20% and take out a $240,000 30-year mortgage at 4%, you end up spending nearly $130,000 in interest on your home’s repayment. Between this and the costs above, you may not make any actual profit if you factor in the money you invest in your home.
The best way to invest
Buying a house can make sense for one important reason – you need a roof over your head and you don’t want to follow the rules set by the landlord. In addition, you may want the stability of owning your own home. When you rent an apartment, your landlord may decide to stop renewing your lease, forcing you to move.
But if your goal when buying a home is to get a solid investment, you can change your mindset and instead focus on other ways to increase wealth. Buying shares, for example, may be the best investment in terms of profitability. You can put $100,000 in your portfolio, sit back, do nothing, and watch your balance grow to $1 million in 30 years without spending any extra money.
None of this should discourage you from buying a home. And there are many good reasons to buy your own home and forgo renting. But you’d better think of your home as an expense rather than an asset whose purpose is to make you money.
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