For many, owning a home is at the core of the ultimate “American Dream.” While how that home-buying dream materializes for each individual or family unit will vary, buying a home boils down to personal financial capability and circumstance. Before getting hot and heavy in to springtime house buying fever along with the rest of your friends and family, be sure your personal finances are backing you. Without the support of solid finances and a reasonably balanced head on your shoulders, buying a home can get sticky- fast. Don’t let your American Dream turn into a nightmare.
Here are 3 reasons buying a home could be a drag on you and your finances:
1. You qualified for a mortgage, but it’s not that simple.
The bank may be chomping at the bit to lend you money to finance your home. But before you sign on the dotted line, promising your precious freedom away to a mortgage company, think hard and fast as to whether you are ready to buy a home. This is where that old adage “just ‘cause you can, doesn’t mean you should” appropriately rears it’s wise, wise head. Banks are businesses. They will profit, bottom line. And they will be profiting off of you. The amount of interest you pay over the life of your loan is staggering. Now add to that the irresponsible borrower behavior that plagues our society. People take out equity as if there home is a piggy bank for their vacations to Cancun, risking their family homes for immediate pleasure. If you can’t resist this temptation, think again before house hunting on Saturday mornings. This 30 year responsibility could literally end up being a: Lifelong. Repayment. Plan. And if you lose your job, hate your job or business slows down? Not only are you on the hook for a mortgage that you may or may not be able to afford, now you are getting crushed by the ADDITIONAL payment you took out to finance a life you couldn’t afford. That “must do” trip to Cancun ain’t lookin’ so care free and fun now.
2. It’s a cash drain
When you write that big fat check for a (hopefully large enough to avoid PMI) down payment, there is no promise you are ever going to see that money again. Life happens. Things change. You can’t always time your sale with the market. Not everyone is in a position, or cut out, to become a landlord. If your situation changes in the middle of a buyers market and you are not able to rent it out to ride it out, you will just be flat out (of cash that is.) Some might call home-ownership an investment- but what are the tangible returns, given you do not fully own the house until the final installment? The equity fluctuates through short term markets without a promise of profit at any given point. Even if you sell the house, you will not always feel the benefit in your pocket. If you just turn around to plant the proceeds into another home, you may not see a penny of it.
The large sum of money you are parting with today may be better spent elsewhere. Crazy idea- what about paying off the consumer debt you accumulated at 18% + interest that chips at your wealth day by day? Instead of dragging around ridiculous high interest credit card debt and throwing a mortgage on top of it, consider your priorities wisely. Don’t have debt? There may be a better investment out there that would see higher rates of return at this stage of your life.
3. Closing and Maintenance Costs
When buying a home, be prepared to shell out about 3% of the total home cost toward closing costs (escrow, appraisal and related fees), insurance, taxes, etc. This is on top of your already sizable down payment. Now factor in moving costs, decor, projects, and remodels that you HAVE to do right away to make it feel like home. If you are not prepared for financial battle, these costs have the potential to cripple you financially. It isn’t hard to get carried away and overextend yourself to a point you are unable to meet your recurrent expenditures. This is a trap. Stay away from things you can’t afford.
Maintenance costs will also add weight to your financial situation after you purchase a home. All homes, regardless of age or size, will need some sort of regular ongoing maintenance. Fact of life. Go ahead and ignore the maintenance. You will have an even bigger headache on your hands later. Deferred maintenance is costly, stressful, and undermines your so called investment. Think you are smarter than the average bear? Plan to sidestep that requirement and buy a brand new home? Same theory applies. EVERY HOME needs maintenance. And remember, builders have varying quality standards, and no one is perfect. People build houses after all. No perfect people. People build houses. Therefor there are no perfect houses. Be realistic when crunching numbers. Make sure you have to cash to cover the common pitfalls. Going into debt to cover these expenses encourages a debt merry go round that you will ride until you fall off or jump off. And neither one feels good.
The one reason why you should buy a home:
One of the brightest, shining spots of home-ownership is the ability to build equity long term. Home values tend to trend up over long periods of time. Despite the volatility of the real estate market in short segments, you can be certain that over a long enough time span, your home value will rise (along with rents.) Owning your own home can help you control housing costs as time goes on, keeping your monthly commitment lower than what rent would be later down the road. You can stay put and enjoy the relatively low, or non existent mortgage, or you can use the equity to buy that house on the hill.
This is not to knock the emotional fulfillment that some people find in buying a home. Sure, it is satisfying for some. But beware. Don’t put buying a home above all else financially and risk being house poor, in debt to your eyeballs, and ill prepared for the future. If buying a house is on your bucket list, let your personal finances dictate your decision now to avoid the drama in the future. Society loves to tell you that the time to buy is NOW, but they won’t save you when the bank knocks on your door for a mortgage you can’t afford. Wait until the time is right for YOU.