Determine If Buying a Home Is Right for You

Consider the risks and rewards of homeownership.

In the short run, renting can make more financial sense than buying, in terms of how much shelter you can afford for a given price.

But the long-range view is different. Over time, rents tend to rise. On the other hand, if you have a fixed-rate mortgage the monthly payment of principal and interest stays the same. This relatively stable cost, combined with price appreciation, is what makes homeownership financially attractive in the long run.

Until the "long run" arrives, however, you may have to make some sacrifices as a homeowner.

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You may have to put up with less space if you have to pay more to own a small home than to rent a larger one. To find a house you can afford, you might have to move to a location farther from your job and favorite haunts; that means extra travel cost and possibly two cars when one used to suffice.

Other risks and rewards to consider:

Reward: The power of leverage

Buying a home offers you the opportunity to magnify the purchasing power of your 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. (See our story Making the Most of Trading Down)

Reward: Tax breaks

Homeowners benefit from the tax deductibility of mortgage interest and property taxes. You can keep up to $250,000 of gains when you sell your primary home ($500,000 if you're remarried and file your income taxes jointly).

Risk: A decline in value

The value of your home is not guaranteed to go up, and it could go down. The rate of home-price appreciation varies over time. When home prices are falling, flat or rising slowly, homeowners must be prepared to wait for better times. 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.

Risk: Reduced flexibility

Homeowners have less freedom of movement; it's not easy to pack up and move for a change of scenery or a new job. Real estate is not a liquid asset. You can lose if you have to sell in a hurry -- because of a divorce or job loss, for example. And a hefty mortgage payment may make it hard to maintain savings and investment programs for retirement, vacations and other things.

If after weighing all of this you're still intent on buying a house, then it's time to take a close look at your finances.