Risks and Rewards to Consider
Reward: The power of leverage
Buying a home offers you the opportunity to magnify the purchasing power
of you money through leverage. Normally, you buy property with some of your
own funds plus a long-term mortgage. That use of borrowed money enables
you to profit from price increases on property you haven’t yet paid
for. Using maximum leverage—with a very small down payment and very
large mortgage—isn’t prudent or advantageous for everyone, but
most first-time buyers will need all they can get just to open the door.
Reward: Appreciation
If your home is worth more when you sell it than when you bought it, that’s
appreciation. You can use the profit as a springboard to a better home.
Or you can tap the equity (what your home would sell for minus what you
owe on the mortgage) to pay college tuition, to buy a vacation hideaway,
or turn it into a source of retirement funds.
Reward: Tax Breaks
Homeowners benefit form the tax deductibility of mortgage interest and
property taxes and can keep up to $500,000 of gains when they sell.
Risk: A Decline in Value
The value of your home is not guaranteed to go up, and it could go down.
The leverage that is so alluring when real estate values are on the rise
can act to magnify losses as well as gains.
Risk: Lost Opportunity
You lose, too, if you invest in a home, money that could have been invested
elsewhere for a better return. If alternative investments—such as
stocks or bonds—are rising in value faster than homes in your area,
you might do better, in the short run, as a renter/investor rather than
a homeowner.
Risk: Maintenance
Homes cost money to maintain. You have to be prepared to pay for routine
maintenance and for the inevitable replacement of big-ticket items.
