Stories like “Making these 2 counter-intuitive decisions can save you millions” seem to make the rounds through social media frequently so I thought I’d take a moment to offer my thoughts.
As a consumer you should be wary of any financial advice couched with terms like “always do this” or “never do that”. Financial decisions are highly personal and will depend on your situation, your goals and the market. If someone is telling you to “always”, or to “never” make certain financial decisions feel free to smile, say thank you and then politely walk away.
Now the disclaimer. I am in the mortgage industry. I tell you this upfront because someone will inevitably try to argue that I cannot be impartial because I have a vested interest in people buying a home and taking out a mortgage.
So I admit that I may have a vested interest in people buying a home and taking out a mortgage but I do not really care if you buy a home and take out a mortgage. As I already said financial decisions (like buying a house and taking out a mortgage) are highly personal and will depend on your situation, your goals and the market. If you’d like to buy a house and you need a mortgage (in Arizona) I’d be happy to help. If, however, you decide that renting is a better financial decision than buying a home, good for you.
Why don’t I care if you buy a home and take out a mortgage?
Well it doesn’t really matter to me. As long as there’s property people will buy and sell it and people will need mortgages. Whether you rent or buy you’re still going to need a place to live. If you’ve chosen to live in a house I will be just as happy to work with the person who owns the house you end up renting. So rent, don’t buy, it doesn’t matter to me.
There are certainly good reasons to rent or lease instead of buying a house. If you move around a lot, have an unstable job situation, desire flexibility, have poor credit, little or no down payment etc.. it may be in your best interest to rent.
Plus renting can be easy and attractive.
My wife and I sold our first home in early 2007 and moved into an apartment while we looked for a new home. We thought we’d be in the apartment for a month or two at most but it ended up being 16 months. There was little incentive to buy while the housing market collapsed so we sat and waited for the market to bottom out.
And I loved it.
I loved renting. We had a nice apartment with a detached garage. There was an onsite gym and two pools, one of which was heated through the winter. The location was great and I didn’t have any maintenance to do. When the hot water heater broke I called someone and they fixed it. I didn’t have any home projects, or painting, no carpet to worry about or roof leaks. Plus we had zero debt. No mortgage, no car payments, no student loans, no revolving credit.
Do you know how good it feels to have zero debt? Better.
It was a pretty glorious 16 months. So if you say you prefer renting I understand. And if you say renting doesn’t make sense for you financially or for your lifestyle I understand. Believe me sometimes I think I’d like to be back in that apartment.
But none of that makes buying a house a bad financial decision.
So let’s look at some of the criticisms.
The down payment and closing costs associated with buying a home can represent a significant sunk cost that cannot easily nor quickly be recouped.
OK, that’s true.
Instead of buying a house you could open a business or invest that money. Except, like housing, neither of those options guarantees a return on investment either, in fact they are generally just as volatile. Plus you can’t ride out the volatility while you live in it and build equity.
If you have enough money for a down payment and closing costs you have to put that money somewhere and that “somewhere” comes with risk. Even stuffing it in a mattress or putting it in a coffee can in the freezer has risk. Which risks are appropriate and appealing to you are up to you but there will always be risk.
Despite the financial and housing crisis buying a house is generally a good, long term investment. If necessary you could use equity in the home for short terms needs through a home equity line of credit (HELOC) or a cash out refinance but buying a home shouldn’t be looked at as a short term investment for most homeowners. Plus owning a house can help diversify a portfolio or 401K already loaded with stocks, mutual funds and/or bonds.
Long term housing gains barely outperform inflation.
Please point me to the investment that returns 10%+ annually with no fees, points or risk.
While a housing may only slightly outperform inflation or the stock market it does generally outperform. Houses gain value over time. And you’re living in it, meaning you are not paying rent at the same time. So the long term performance of a house as an investment isn’t just the increase in total value it is also in the investing of mortgage payments towards an asset instead of the total loss represented by a rental payment.
So if you buy a house and you make your payments the property value will generally increase, the principal owed will decrease, you won’t be paying rent and at the end of the loan you will own the property outright.
And owning a property outright, I believe, is the biggest benefit. Here’s why.
Rent will always increase while mortgage payments remain stable, unless your mortgage is an Adjustable Rate Mortgage (ARM). And once a property is paid off your housing costs are eliminated (not including taxes, insurance, and maintenance).
Where will you be spending your golden years? Will you still be renting? If you have the long term investments to sustain paying rent indefinitely great but it’s hard to argue that living “rent free” is a negative.
Having paid off a home brings with it tremendous financial freedom and flexibility. Certainly renting brings flexibility, when your lease is up you can move anywhere. But you still need to generate the income to make a rent payment. Owning a home outright eliminates the need to generate the additional income required to make a rent payment.
As I already said, twice in fact, financial decisions (like buying a house and taking out a mortgage) are highly personal and will depend on your situation, your goals and the market. But buying a home, in and of itself is not necessarily the disastrous financial decision many make it out to be.
For more information contact Aaron Walker or Jay Rapson at Aaron Lending, LLC.