Home ownership has long been part of the American Dream. But if you’re not careful, it can be a nightmare.
Here are some things to consider before committing to that 3BR/1.5B rancher you saw on Zillow.
There is lots of upside to home ownership. That’s why about two-thirds of Americans own their residence. Among the benefits:
- Asset building. With every house payment you own a slightly smaller piece of an asset that will hopefully increase in value over the years. Rent is an expense, pure and simple.
- Tax benefit. The interest portion of your mortgage payment is tax deductible.
- Stability. Homeowners don’t worry about having their leases cancelled or rent jacked through the roof.
- Ownership. It’s your place. Totally. Go ahead, re-do the living room in a “The Force Awakens” theme, complete with murals and full-scale Millennium Falcon cockpit seating area.
Of course, for nearly every upside, there is a less-than-thrilling aspect to home ownership, including:
- Cost. The cost of crib ownership goes well beyond your mortgage payment. Maintenance and major repairs are just some of the biggies.
- Stress. “You don’t own a house, it owns you.” There is always something in a home that needs attention; always something to be at least a little concerned about.
- Property Taxes. Another considerable expense.
- Opportunity Cost. The down payment on a house – ideally 20% -- is money you could have otherwise invested.
- Limited Options. Buying a house is a pretty heavy commitment to an area and the life that comes with it. You can’t just let the lease run out and move to a bigger, closer-to-work place.
To Buy, or Not to Buy
If you’ve considered the above and you still think home ownership is the right move, it’s time to consider a few other issues:
Timeframe. How long do you plan to live in your next place? If it’s less than five years, you are probably better off renting. Short-term ownership leaves you eating the upfront costs of the purchase and probably won’t provide enough appreciation to help offset the real estate commission and others cost of selling.
Employment situation. Happy in your job? Got some seniority? Good. Lenders will be looking for at least two years of earning history. And you don’t want to make a commitment like this if you’re humming, “Take This Job and Shove It” in the Monday staff meetings.
And the Big One…
Budget. How much can you really afford to pay for a house? That’s an entirely different question from how big a mortgage you can get from the bank.
Lenders are likely to approve you for a mortgage with payments equal to 30-35% of your monthly pre-tax income. You don’t have to take all that money. We suggest you try to stay closer to 25%.
Remember our “TSL” spending model? Taxes get 30% of your gross income 20% goes to savings, and Life gets the remaining 50%. A too-big mortgage will limit how much you can spend on other Life stuff – like travel, entertainment and food. Trust me, that huge open kitchen won’t seem so awesome when all you can afford to cook is ramen noodles.
Be sure to factor in the additional monthly costs of home ownership in determining your budget, including property taxes, home owners association fees, insurance and the always-irritating maintenance.
Is there any workplace conversation more tedious than people comparing notes on how much their houses have appreciated?
Yes, houses very often increase in value over the long haul. Sometimes significantly. Does that make your primary residence a great investment? Welllll….
It’s an investment, for sure. But it’s fairly illiquid and comes with tremendous costs.
When Jake from H.R. is yapping on about how he and his wife made a “$15,000 profit” selling their house, he probably isn’t deducting the years of routine maintenance costs, the new roof, the landscaping, the two giant oak trees that had to be cut down in ’09…. Oh, and the real estate agent’s 6% fee.
Bottom line: It’s probably better to make your house buying decision based on lifestyle stuff, not as an investment move. Whatever gains you realize when you finally sell will be tasty icing on a cake made of great memories in a wonderful home.
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