Buying a home is the biggest investment most people ever make. While there are many benefits to buying a home, there also are significant risks. Here’s a look at 11 risks of owning a home.
1. High Upfront Costs
For the average homebuyer, there’s no getting around the need for cash to buy a house. Even when you’re taking out a mortgage to buy a home, you need cash for a down payment and closing costs.
For example, a conventional loan requires a down payment of at least 3%. On a $500,000 home, that’s $15,000. To avoid having to pay for private mortgage insurance, you need a down payment of at least 20%, or $100,000 for that $500,000 home. You also need cash to pay your closing costs, which you can expect to be 2% to 5% of the home purchase price — another $10,000 to $25,000.
2. You’re Responsible for Maintenance and Repairs
One of the perks of renting a home is that when your home needs repairs or maintenance, you call the landlord or property manager to handle it. When you own a home, you’re responsible for getting problems fixed — and for paying the bill.
Some repairs will be minor enough to handle yourself. Larger issues will require you to hire professionals. As a general rule, it’s advisable to set aside 1% to 2% of the purchase price of your home for maintenance.
3. You Have To Pay Property Taxes
When you rent, you don’t have to pay property taxes directly, even though your landlord will use some of your rent for that purpose.
As a homeowner, how much you’ll pay is determined by your property’s fair market value and the tax rate in your state, county, or municipality. Most homeowners pay a prorated amount into an escrow account set up by their mortgage lender, which uses the money collected to pay taxes on time and in full. This makes paying the bill easier, but it does increase your monthly payment.
4. You May Have To Follow HOA Rules
If your home is part of a homeowners association, then you’ll need to pay dues and obey its rules. HOAs set standards that members must follow, which may restrict what color you can paint your home, what kind of pets are allowed, how much noise you can make, and when and how you can use common amenities. That means you might not always be able to do exactly what you want with your home.
5. You Must Buy Homeowners Insurance
You can expect your lender to require you to buy homeowners insurance, which protects against losses or damage to your home, property, and belongings. You’ll typically pay your homeowners insurance premiums through an escrow account as part of your monthly mortgage payment.
6. You May Need To Pay For PMI
If you take out a conventional loan and make a down payment that’s less than 20% of the home’s purchase price, then you’ll need to pay for PMI. Even though you pay for it, PMI protects the lender — not you — if you’re unable to repay the loan. You’ll typically pay for PMI as a monthly premium that’s added to your mortgage payment, though there are some cases where you’ll pay an upfront premium.
Once you’ve reached 20% equity in the home, then you can cancel PMI — but until then, there’s no getting around it.
7. It’s More Difficult and Expensive To Move
When you’re a renter, you only need to wait until the end of your lease before you can move without penalty. Some landlords let their tenants continue on a month-to-month basis when their lease term is up.
When you own a home, moving isn’t so simple. You’ll need to find a buyer while looking for a new home, or else you’ll wind up paying two mortgages at once. Buying a new home also comes with additional upfront costs.
8. Your Home Could Lose Value
Over the past 50 years, home values in the United States have increased steadily and significantly. However, there were short-term periods where home prices dropped. This famously occurred during the Great Recession, when the average home sales price fell from $322,100 to $257,000.
That means it’s possible for your home to lose value. Your home also can depreciate if you don’t maintain it and its condition deteriorates.
9. Equity Grows Slowly
When you first start paying your mortgage, you build equity slowly because most of your monthly payment goes toward paying interest instead of reducing the principal. Over time, more of your monthly payment goes toward paying down the principal, which helps you gain equity faster. But it takes time to really start making a dent in that principal balance and build equity.
10. It’s Difficult To Cash Out Your Equity
Your home equity is a real part of your wealth, but it’s not a liquid asset that can be easily converted into cash. To turn your equity into cash, you need time to refinance your mortgage or to sell your home — either of which will take at least a few weeks, if not longer.
11. Foreclosure Is Possible
It’s a worst-case scenario, but it’s possible that you could lose your home to foreclosure. If your home is foreclosed on, the lender can repossess the home and recoup its costs by selling it to another buyer. The new owner could then evict you, if you don’t leave the home voluntarily. In addition to losing your home, your credit would be badly damaged.
FAQ
Here are answers to some frequently asked questions about the risks of owning a home.
