FINANCIAL EDUCATION SERIES 2010
INVESTMENT AND INSURANCE PRODUCTS: NOT FDIC INSURED • NOT A BANK DEPOSIT •
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NO BANK GUARANTEE • MAY LOSE VALUE
Homeownership also has enormous
emotional appeal. We like to own the
four walls that surround us. We tend
to show far greater patience with real
estate than with, say, our stock market
investments, in part because we don’t
get continuous price updates. Yes, our
homes may have lost value this year —
but because we don’t know precisely
how much, it is hard to get too upset.
Still, this doesn’t mean you should load
up on real estate. Here is why a home
can be a great investment and where
things might go wrong.
HITTING A HOME RUN
At first blush, real estate doesn’t seem
like any great shakes. According to
home finance corporation Freddie Mac,
home prices have climbed 4.3% a year
over the 30 years through year-end
2009, versus 3.5% for inflation.
Yet many folks fare far better than
these numbers suggest — thanks
to their mortgage and the way
it leverages gains. Let’s say you
purchase a $200,000 home. You
borrow $160,000 and put down 20%,
or $40,000, which represents your
initial home equity. If your home’s price
climbs 20% to $240,000, your home
equity will jump 100%, from $40,000
to $80,000.
Your home equity will also grow as
you pay down your loan balance. In
effect, you’re saving money with every
monthly mortgage payment.
On top of all this, there are the tax
breaks. You can deduct the interest on
up to $1 million of mortgage debt used
to acquire a first or second home.
You should also be able to deduct your
property taxes, as well as the interest
on $100,000 of home equity borrowing
used for any purpose. When you sell
your home, you can exclude up to
$500,000 in capital gains if you are
married and $250,000 if you’re single.
But maybe the biggest benefit comes
when you get the mortgage paid
off. At that point, you will still have
to pay property taxes, homeowner’s
insurance and maintenance costs. But
the monthly mortgage payment will be
gone — and with it one of your biggest
living expenses.
STRIKING OUT
Sound attractive? Now, consider
the downside. While a mortgage can
leverage your home’s price gains,
the math can also cut the other way.
Take the example above. What if your
home’s value drops from $200,000
to $160,000? Your $40,000 down
payment would be wiped out.
“You want to buy a house that’s
the right size for your budget, the
right size for your family — and
that you can see living in for a
continued
Your Best Investment? The Pros and Cons of Owning a Home
Almost seven out of ten American families are owners rather than renters — with good reason.
Congress has showered real estate with tax breaks, making it possibly the most tax-favored investment. Indeed,
even after the recent slump in property prices, many folks boast that their home is the best investment they
ever made.
Leverage also doesn’t come cheap.
Mortgage interest may be tax-
deductible. But it is still costing you
a bundle. If you pay $1 in mortgage
interest and you’re in the 25% tax
bracket, you will save 25 cents in
taxes — which means the other 75
cents is coming out of your pocket.
The costs don’t end there. When you
buy, you will be dinged for a home
inspection, title insurance, legal fees
and mortgage application costs. You
might also pay points to get a lower
interest rate on your mortgage.
Once you own the place, you will
have hefty ongoing costs, including
the monthly mortgage, homeowner’s
insurance, property taxes and
maintenance expenses. You may also
make home improvements, which
tend to be money losers. Time to sell?
You may lose 5% or 6% of the selling
price to the real estate brokerage
commission.
In fact, if you deduct all the costs of
homeownership from your home’s
price appreciation, you may find you
have made little or no money. For the
same reason, if you buy a vacation
home for your own use, you probably
won’t notch much of a profit.
SKIPPING THE RENT
That doesn’t mean homeownership is
a bum deal. Sure, you may not make
much on the appreciation, after all
YOUR BEST INVESTMENT? continued
For more information, please contact your
Citi Personal Wealth Management advisor.
The information provided is solely for informational purposes. It is not an offer to buy or sell any of the securities, insurance products,
investments, or other products named.
Sourcing: Statistics on homeownership come from the Federal Reserve’s Survey of Consumer Finances 2007.
Please note that when visiting the URLs referenced within this piece, you will enter another website created, operated and maintained by a
different entity.
Past performance is not a guarantee of future results.
Citigroup Inc. and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is
not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer
should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
A Citigroup Global Markets Inc. relationship does not have to be established or maintained to obtain the products or pricing offered as part
of the Citigroup Global Markets Inc. Home Loan Program at Citibank. Home equity programs not available in AK. A default (stopping monthly
payments) on a mortgage could result in the loss of pledged real estate, securities or both.
Our policy does not permit clients to use the proceeds of a home loan to invest in the securities or related markets. Your Financial Advisor may
receive compensation in connection with this lending program. Affiliates of Citigroup Global Markets Inc. may earn fees in connection with the
funding, origination, and sale of a loan.
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throughout the world.
712810 NAT07 10/10
On the other hand, you don’t want to
buy a place that is too big for your
family. The reason: You are tying up a
heap of money in an asset that won’t
generate much price appreciation and
that you aren’t making full use of.
Moreover, a big house and the
accompanying mortgage payments
may leave you with little financial
breathing room. If you get hit with
a slew of unexpected expenses, the
sizable monthly mortgage payments
may quickly become a millstone.
The bottom line: When you hunt for a
home, try to hit the sweet spot. You
want to buy a house that’s the right
size for your budget, the right size for
your family — and that you can see
living in for a good long time.
Citi Personal Wealth Management
is committed to your long-term
financial success. You can expect
professional advice tailored to your
needs, convenient access to Citi’s
global resources, and a broad range
of diverse investment products.
costs are considered. But you also get
to live in the place without paying rent.
Indeed, this rent-free living is the big
payoff from buying a house. Imagine
you didn’t own your home and instead
had to rent it. You might end up forking
over an annual sum equal to maybe
7% or 8% of your home’s value. That
is an indication of how much value
you’re getting by owning your home
and living in it.
What should you make of all this? On
the one hand, you don’t want to buy
a house that’s too small or you could
quickly become dissatisfied and end
up moving. That will mean incurring
the steep cost of buying and selling
real estate.
HOME PAGES
• Get an estimate of your home’s
value at www.zillow.com.
• Hunt for your next home at
www.realtor.com and explore
different places to live at
www.bestplaces.net.
• To see how much you might
recoup from a remodeling project,
check out the Cost vs. Value
survey at remodeling.hw.net.
