Mortgage Guide

What You Should Know About Owning a Home

Renting vs Owning

If you're looking for the best return on your money, historically you're better off investing in the stock market than buying a house. Primary homes generally don't earn the investment return of financial instruments such as mutual funds. While the stock market's long-term average rate of return is in the range of 8 percent to 10 percent, housing historically has appreciated on average in the low- to mid-single digits. Don't buy solely for investment gain.

On the other hand, Uncle Sam helps out by letting taxpayers deduct part of the mortgage interest and real estate taxes each year. Borrowers get the benefit only if they pay enough in one year to exceed the standard deduction. But that usually happens, especially during the first few years of a mortgage when most of each payment goes toward interest rather than principal.

The Pros of Owning a Home

Owners enjoy other benefits, too. They build equity over time as home values rise and their mortgage balances shrink. They also

don't have to worry about their housing costs shooting through the roof because lenders can't boost borrowers' rates and payments, unless those borrowers have adjustable-rate mortgages.

The Cons of Owning a Home

When something breaks at an apartment, it's the landlord's problem. When it's your name on the deed, the problem is yours. If you throw every penny into a down payment, you're taking a big risk because you may not have enough money left to fix leaky pipes or buy a new air conditioner.

Potential buyers might want to hold off for other reasons. If there's a good chance that you will be laid off soon, you might want to wait. The same goes for people who plan to leave a job soon. The monthly payment isn't the only obstacle for this kind of customer. Closing costs and other home-buying fees, as well as the commission that most owners end up paying to real estate agents when they sell their homes, add up. People who have to sell after living in one place for only a short time can end up in the hole on their investments.

Explore all the options

Some middle-ground approaches to homeownership blend elements of buying and renting. Some of the more popular loan types are seller financing, "lease with an option to buy" and "contract for a deed" plans.

Seller financing

In seller financing, the buyer buys a $150,000 home by taking out an $80,000 bank loan, putting $10,000 down and getting the seller to "carry back" a $20,000 second mortgage. The buyer makes payments on the first loan to the bank and the second loan to the seller. That second mortgage from the seller usually comes with a higher rate, a shorter term and a potential balloon payment. Or, the seller can hold the entire mortgage and the buyer makes payments directly to the seller.

Pro: It reduces the cash needed to get into a home and could reduce closing costs.

Con: There are two monthly mortgages payments and the seller determines the interest rate for the second loan.