Why Your Home May Not Be The Investment You Thought It Could Be
You may have heard that buying a home in College Station to live in is a great investment since the mortgage you pay can provide some tax deductions (unlike paying rent) and in the future you may be able to sell your home at a higher price than you paid for it. The truth is that buying a College Station home is not always the best investment for everyone. In fact you could find yourself facing a net loss on the home over time after paying for things like updates, paying all the mortgage interest, paying for home repairs and more. So buying a home for solely for investment reasons could be a mistake and depending on market conditions or the condition of your home, your investment could end up costing you more instead.
Over Bought On The Home, Now Deferring Repairs
Over buying a home when you should have purchased something cheaper can put you in a house poor situation where you don’t have enough money to cover both the mortgage payments and the routine repair and maintenance of the home. The costs to repair an issue with your home early on will generally be cheaper than if you let the repair go and are forced to repair when it gets really bad. Imagine a small leak in your roof that you cannot afford to have repaired since you are barely keeping up on your mortgage payments and don’t have enough free cash flow to pay for a service call. That small water leak slowly becomes larger over time and any water that comes through does not just stay in one spot. That water in turn if it sits around for a while then can feed mold spores that end up inside the attic and other parts of your home. Now what was a relatively inexpensive repair to patch a hole becomes a repair requiring patching the hole as well as treating the mold and possibly tearing out parts of your home where the mold cannot be removed through treatment.
So whereas you saved money by not doing the repair when you first noticed the issue now that the damage has gotten to extreme levels and as a result you could be forced to leave the home due to the mold contamination. No one is going to buy your home with its current condition for the same price you paid. If the value of your home is now below what you owe to the mortgage company you are looking at a short sale if the mortgage company approves or you are letting the house go into foreclosure just to get rid of one mortgage payment. The end result is the same. The great home investment you thought you were making is now instead a nightmare that will ruin your credit and possibly still leave you on the hook to pay back the money that you owe to the mortgage company.
The Home Mortgage
Yes you do get a mortgage interest deduction that could save you in taxes every year that you have mortgage interest to report. Over time though as you pay your mortgage down your principal payments increase and your interest payments decrease due to the way the loan is setup (known as the amortization of the loan). So that mortgage interest tax deduction that was nice in the beginning is not so great when you are towards the end of your 30 year loan.
The amount of money you pay towards interest on your mortgage can be very high. For instance see the following examples:
Amount Borrowed Interest Rate Total Interest Payments 30 yrs. Total Payments
$200,000.00 4.0 $143,739.50 $343,739,50
$300,000.00 4.0 $214,177.80 $514,177.80
$200,000.00 5.0 $186,508.80 $386,508.80
$300,000.00 5.0 $279,765.80 $579,765.90
$300,000.00 6.0 $347,513.60 $647,513.60
As you can clearly see as the interest rate goes up so does the amount of interest you must pay to the mortgage company for your loan. In higher interest rate times it would be common that the amount of interest you would have to pay back over a 30 year period would be more than the amount you actually paid for the home. For the time being our low interest rate environment means your total interest payments over 30 years are less than what you paid for the home but they are still a substantial sum of money you are paying to a mortgage lender.
You can save money on interest payments by having a lower interest rate (when available) or by having a shorter term to pay back the mortgage. So rather than paying back a mortgage within 30 years you instead opt for a 20 or 15 year mortgage you will be paying less in interest to the mortgage lender. That being said your mortgage payments will be higher as a result since you are paying back more principal at a faster rate. So in the $300,000 example above at 4% interest rate, if you shorten the term to 15 years then you will only pay $99,431.20 in interest for a total payment back to the lender of $399,431.20. Compare that number to the total payment on the 30 year loan of $514,177.80. The monthly payment on the 15 year loan for $300,000.00 at 4% would be $2219.06 whereas the monthly payment for the same loan at 30 years would be $1,432.25.
The above mortgage numbers do not take into account the property tax, insurance, and other costs you will be paying as well. Whereas the property tax you pay may be deductible on your taxes, homeowners insurance is usually not. The actual mortgage deduction simply allows you to reduce your reportable income to the federal and state government and is not a dollar for dollar tax credit. What that means is if you earned $70,000 in income for a particular year and have paid $5,000.00 in interest on your mortgage for the same year you can report your income as $65,000.00 and avoid having to pay taxes on $5,000.00 of your income. If you are paying 15% taxes on your income then that $5,000.00 deduction means you don’t have to pay Uncle Sam $750.00 you would have owed had you not had a mortgage interest deduction (note these tax examples have been simplified and your actual results will vary). So that mortgage interest deduction may not be that big of a deal considering you are in fact paying $5,000.00 in interest to a mortgage lender and only saving $750.00 in income taxes as a result.
The Need For Updates
Even if you buy a new home or an old home that has been recently updated if you plan on spending any amount of time in the home then you will be faced with the decision to update the home. Whether the style of flooring changes from marble tile to hardwood or wall treatment changes from wallpaper to no wallpaper, if you want your home to retain its value then it will need to be updated in order to keep it comparable with other homes being sold at the same time. Simpler changes like the type of flooring or putting in new carpet are not that expensive depending on the frequency with which the changes are made. If you like to keep your home up to date on a more frequent cycle then the need to update the surface aspects of the home will be greater and therefore the costs will add up over time.
Changes like going from a closed floor plan to a more open floor plan can require extensive reworking of the home in order to ensure you don’t affect the ability of the home to remain standing. When you start taking out walls, adding to the external footprint of the home, raising ceilings or more then you often times will need the services of an architect to design plans for your remodel. Additionally major additions and renovations to the home may require the obtaining of permits from your local building authority. The last thing you want to do is skimp by avoiding permits since that will also affect future buyer interest in your home. If a buyer finds out that certain renovations that required permits do not have them your buyer could walk away or worse you may be forced to undo the changes.
The costs of these updates are over and above your cost for paying for the home and are generally required in order for your home to retain its value. After all no one will be willing to buy your home if it has not been updated unless it is priced at the price point where a buyer feels they can update the home and maybe get a decent investment out of the update in terms of a higher value to them. What that means is your home is now considered a “fixer upper” or “in need of TLC” home and should have a price to reflect that condition otherwise you will have no offers to buy your home.
Pick A Declining Neighborhood
You may purchase a house in a neighborhood that is ok now in terms of quality and conditions of the home but depending on the time frame you live in the home that neighborhood could experience a decline and as a result your home value will also decline. Many major cities like College Station have areas where once grand homes now sit in decay due to the neighborhood declining. The neighborhood could have declined due to a major employer moving out of the area, a natural disaster or other reasons. So while you purchased your home hoping to gain in value, instead due to some external factor your home value is no longer where it used to be.
Another scenario is where your home gets hit by a natural disaster which is considered an “act of god” and which may not be covered under the insurance policy for your home. If an event like tornado, flooding, or hurricane damage or destroy your house you may not be able to get any insurance payments for those “acts of god” thus leaving you on the hook to make the repairs out of your own pocket. That is if the home can even be repaired. If the repairs cost more than what you owe on the house it may not make financial sense to do the repairs and as a result whatever you paid to purchase the house is lost.
Homeownership Can Be A Good Savings Plan
Owning a home can work out in the end to be a good savings plan for some since the process of paying off a mortgage contributes to the equity in a home. While there are still interest payments to be made the equity built up over time represents a forced saving plan since the value in that equity is not as easily accessed as you can with cash in a bank account. While home equity lines can be used to access some of the home’s value that money must still be paid back which goes back to building the equity value in your home.
A home should not necessarily be considered an investment since over time the cost of interest payments, property taxes, insurance, update and upkeep could eat up any appreciation you expect in the home price due to inflation or property appreciation. In the case where you happen to pick a neighborhood in decline or are unable to keep up with the amount of repairs/updates needed to keep a home competitive with other homes there is no real investment appreciation. Home ownership can work as a forced savings plan for the long-term owner.