The Dangers of Owning Your Own Home

January 2, 2007

Blueprint for Financial Prosperity is running a Devil’s Advocate series and his first article is Rent Forever, Don’t Buy A Home. We own our home and despite the repair work and property taxes he mentions, I’m glad we decided to buy our own place. However, there are two that mistakes I think it’s easy for homeowners to make.

Over Valuing Our Net Worth
Many people figure the value of their home into their net worth. I don’t like this for two reasons:

The first is that, like a stock, your home isn’t actually worth anything until you sell it. Once you sell it, where will you live? If you buy another house then you’re just locking that money back up in property again. You won’t actually realize the gain until/if you sell your house and move into a smaller, cheaper one.

The second is that people sometimes feel they don’t have to save or invest as much because, according to an appraiser, their home has appreciated a great deal. This can be dangerous because housing prices can fall and if you haven’t been saving and investing then you could be in a pickle. Your house is only worth as much as someone is willing to pay for it.

Reckless Borrowing Against Equity
How many advertisements do you see or hear a day for home equity loans? If you’re sitting on thousands of dollars of equity in your house, it may be tempting to tap into it to take that trip you’ve always wanted or to speculate on a new great stock tip you don’t want to miss out on.

If you’re considering borrowing against the equity in your home, sleep on it for a while. Think about how nice it is to have a roof over your head. Is what you stand to gain from a home equity loan worth the risk of potentially losing your home?

Ben

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Ben
Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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Comments

4 Responses to The Dangers of Owning Your Own Home

  • Enough Wealth

    IMHO this is a load of bollocks.

    1. Real estate, stocks or any other asset have a worth at all times – it’s just that until you sell it the calculation of their “worth” is just an estimate. (For stocks it easier to get an accurate estimate as their are comparable sales happening all the time, for real estate valuation is a bit more of an art than science).
    2. You home equity IS part of your net worth. The money realised can be used for any purpose – while you might buy a similar property, you could also “up size” to a more expensive property and take on more debt (but this wouldn’t change your net worth, just your gearing), or you could down-size to free up “cash”, but you could also start to RENT like lots and lots of other people. If you sold your house and started renting the realized equity could now be sitting in a bank account – would you still try to argue that this money doesn’t count as part of your net worth? An asset is an asset, regardless of current usage. Every asset is only worth what someone is willing to pay for it. And what you do with the realized value once its sold is irrelevant.

  • jim

    I wholeheartedly agree with your assessment of home value and the artificialness of it, how it can lead people to make some very bad financial decisions. I’m glad I bought my house too and I don’t really consider it a part of my net worth (outside of the purchase price).

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