4 Good Reasons Not to Buy a Home

By Markets Fool.com

Source:Flickr user Wesley Fryer.

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For many, homeownership represents the ultimate American Dream. But in reality, homeownership is not all rosy. There are countless costs involved in owning a home, not to mention the time and effort it takes to maintain it. While some argue that buying is a far more economically sound than renting, owning a home has its drawbacks. And apparently a lot of people agree, because homeownership in the U.S. has been on the decline in recent years.

Here are a few reasons why owning a home may not be the best financial move for you.

1. It's not the safest investment
Real estate is relatively illiquid, as selling a home, especially in today's market, is no easy feat. Many real estate experts agree that you generally have to live in a home for at least five years before you're in a position to make money off of it -- but even the infamous five-year rule is far from a guarantee. Home prices in the U.S. usually rise about 3.5% per year.That might sound like a lot, but when you factor in inflation, maintenance, repairs, and closing costs, your home might have to appreciate a lot more than 3.5% a year for you to recoup your money, let alone make a profit.

Let's say you buy a home today for $200,000. If that home's value climbs 3.5% per year, then it will be worth about $237,000 five years down the line. But while a $37,000 profit might sound like a lot, think about the amount you might put into a home over the course of five years. Say you're hit with $8,000 in closing costs (a reasonable assumption, as closing costs are typically 2% to 5% of a home's sale price) and you spend $6,000 a year on property maintenance. Suddenly, that $37,000 "profit" is completely wiped out.

True, your maintenance costs could end up being the equivalent of the premium you'd pay to rent, so with regard to standard maintenance alone, you could still come out ahead by owning. But if you get stuck with a major repair, and that repair doesn't add value to your home so much as keep it functional, then you face the possibility of forgoing profit when the time comes to sell. And let's not forget that most people require the help of a real estate agent to sell their homes, which means forking over about 5% of the sale price in commission charges.

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All in all, you could actually lose a great deal of money on the sale of your home. Granted, the stock market is also considered pretty risky, but if you wind up having to sell off some stocks at a loss, it can at least serve as a tax deduction. On the other hand, if you sell your home at a loss, you won't see a dime in tax benefits.

2. You'll spend a lot on mortgage interest and taxes
You need to live somewhere, so let's assume that if you didn't have a mortgage, you'd be shelling out the equivalent of your principal payment in rent. But when you factor in the amount you're paying in mortgage interest plus real estate taxes, well, that's a whole lot of extra cash you're allocating to housing costs. And yes, unlike a rental, a home is an investment, but it's also an expense.

Let's say you buy a $200,000 home, put down 20%, finance the rest with a 30-year mortgage, and pay $4,000a year in real estate taxes. If you're in the 30% tax bracket, you'll save about $3,600 in taxes during your first year of homeownership. But think about how much you'll wind up spending just to get those savings. While you'll spend more money on interest early in your mortgage than you will down the line, in that first year you're looking at a good $5,000 in mortgage interest in addition to that $4,000 real estate tax bill. So, while a tax deduction might sound like a great perk, in reality, you're paying $9,000 to save $3,600, which suddenly doesn't seem like such a great deal.

3. That mortgage interest deduction may not last forever
You know that mortgage interest deduction we just talked about ? Don't count on being around forever. Currently, homeowners save about $70 billion a year by writing off their mortgage interest, which means that's $70 billion the government doesn't get its hands on. As such, critics of the current system have been pushing to reduce or eliminate the mortgage interest deduction, claiming it doesn't do enough to encourage homeownership and really only benefits the country's highest earners. While there's no predicting what the future will hold, signing up for a mortgage means taking the risk that one day, you may not reap the same benefits offered to homeowners today. Remember, most people who finance their homes take out 30-year mortgages, and a lot can change over 30 years, for better or for worse.

4. You're stuck in one specific place
Imagine getting a phone call saying your dream job is suddenly available in another part of the country. If you own a home, picking up and moving is easier said than done. Whereas most rental agreements can be broken for a one-time fee, when you own a home, you're on the hook for that mortgage for as long as your name is on the deed. This means that if you're looking to go elsewhere, you'll need to sell your home, find a renter, or deal with paying your mortgage on top of whatever housing expenses you incur at your new residence. Of course, for most people, the latter simply isn't feasible, but selling a home can be a long, drawn-out process, and renting out your home comes with certain risks, like landing a tenant who doesn't respect the property or pay rent on time. And while owning a home isn't the only thing that might prevent you from pursuing new opportunities, career-related or otherwise, it's certainly a limiting factor.

For many people, buying a home is a great decision, and there's certainly something to be said for the pride that comes with having a place to call your own. But before you make the leap into homeownership, consider the costs and sacrifices that come along with it -- because once you sign those mortgage papers, it's not so easy to turn back.

The article 4 Good Reasons Not to Buy a Home originally appeared on Fool.com.

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