Housing Myths

MOST FOLKS SHOULD, at some point, go from renting to owning. But you need to do so with your eyes wide open. Housing is a source of endless confusion—which isn’t surprising given that there are so many moving parts, including attractive tax breaks, fluctuating property prices, leverage from any mortgage debt, and the monthly mortgage payment’s shifting mix of principal and interest. Here are five common myths:

“You can’t go wrong with real estate.” You heard this often before and during the early 2000s real estate bubble, but far less frequently since the brutal decline that saw homes lose more than a quarter of their value between mid-2006 and early 2012. The potential for another severe decline should factor into your decision about whether to rent or buy.

“My house is the best investment I’ve ever made.” Paying down a mortgage forces people to save and owning a house gives them a place to live. But what about home price appreciation? Historically, that’s been modest and largely offset by the costs of homeownership.

“The bank owns half my house.” Not true. The bank merely lent you money. Unless you plan to go into foreclosure, you own 100% of your home—and benefit from any price increase and suffer any decline.

“You should take out the largest mortgage possible.” Many homeowners think mortgage interest is some sort of financial freebie. Think again. If you’re in the 22% federal income tax bracket, pay $1 of mortgage interest and itemize your deductions, you’ll save just 22 cents in federal taxes—which means the other 78 cents is coming out of your pocket.

“Our new kitchen added $100,000 to our home’s value.” The home may have climbed in value. But the boost from the new kitchen was almost certainly less than its cost. Homeowners typically don’t fully recoup the cost of remodeling projects.

Next: Real Estate Returns

Previous: Five Reasons to Rent

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