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Homeownership is part of the American dream; it’s the largest purchase most make in their lives, and it can be an excellent tool for building wealth.
Unfortunately, like any tool, homeownership can hurt you if misused. Here is the biggest mistake homeowners make and how to avoid it.
Image source: Getty Images.
Owning a house can be a financial perk; homes have historically risen in value over time, helping build wealth. Ownership is also emotionally rewarding for many; your home is yours, which means you can paint the walls or tear up the carpets as you see fit.
However, it can hurt your finances if you move too often. Real estate company Redfin says the average U.S. home sells every 13 years.
Life happens, and moving can be reasonable if you’re relocating for a lucrative job, but people often move for other reasons. The National Association of Realtors conducted a survey that revealed the top three reasons people sell their homes:
Moving isn’t the end of the world; people always do it. But most don’t realize how much it can cost you if you do it too often.
A 30-year mortgage is the overwhelmingly popular method of payment for homes, which banks love. A mortgage has a payment structure of 360 monthly payments; you own the house outright after that last payment.
Most don’t realize that banks front-load their profits on the loan, known as your mortgage’s interest. The payments in your early mortgage years go primarily toward interest, with little money going toward the principal of the loan.
For example, the monthly payment on a 30-year mortgage for $200,000 at an interest rate of 5% would be $1,073.64. On that first payment, $833.33 is interest, and just $240.31 goes toward that $200,000 principal balance. The scale slowly tips every month, and the tables eventually turn; your monthly payments will be almost all principal and little interest by the end of your 30-year journey.
Remember how the average homeowner only stays for 13 years? After that amount of time, the monthly payment would still be $613.94 of interest versus $459.70 of principal. That means you’ve paid the bank more than you’ve paid for your home after over a decade.
People who move often spend a lot of their time filling the banks’ pockets with interest payments and only get minimal home equity, hoping the market is hot enough to raise home values to make up for that. Staying put long enough to pay down your principal meaningfully is the secret to getting the most out of owning a home.
I’m not trying to tell you that you can never move; again, life happens. The best thing you can do is to try thinking about the long term before you buy a house. Do you want kids? Maybe you should factor that in before purchasing a bachelor pad. Of course, you can also pay extra toward your mortgage, putting money toward the principal once you’ve covered your monthly payment.
There is nothing wrong with renting if you need mobility or are unsure about where you might want to live over the long term. With some planning and thought, homeownership can be a dream come true. Just make sure you’re playing the game to your advantage, not the bank’s.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Redfin. The Motley Fool recommends the following options: short August 2022 $13 calls on Redfin. The Motley Fool has a disclosure policy.
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