Should I buy a house? Liberating myself from the house fetish

Should I buy a house? Liberating myself from the house fetish

Should I buy a house? Is it better to buy a house or to rent one? Common knowledge says renting is just like throwing money down the drain. A closer look shows that the issue is not that simple.

The million-dollar answer to this question puzzles many of us. When questioning yourself if you should buy a house, you might think that anything is better than to waste money with rent payments. The reality is that the answer is a bit more complicated than that. 

The costs of buying and owning a house are much higher than the property value itself. It is common for home buyers to focus too much on the new home price, and forget to consider if they can afford the associated costs. Mortgage interest, transactional fees, maintenance, and opportunity costs are just a few of the additional burdens for the homeowner. 

On the other hand, not owning a home may constrain you of a feeling of belonging, security, and pride. Moreover, there is always a risk that over time your neighboorhood can thrive. With that, real state prices soar, and house owners end up with a significant gain of capital. 

Am I buying a home or investing my money?

There are many cases where people decide buying a home after hearing about a home buyer that made money after home prices went up. The big question here is, were these people lucky or conscious investors? 

My first advice: make up your mind if you are looking for an investment or a sentimental safety net. Do you want to buy a house to make money or to your first home and feel good about yourself and your family?

To truly understand the cost of the home purchase, you must go through the home buying process a couple of times. Put your homebuyer cap on and go for the chase, start understanding how the housing prices evolve in your area. 

Go through the process of getting a mortgage, visit houses for sale, do your research. At the final step, retreat, and revise the pros and cons of the deal against the rental option. 

Homeownership is probably one of the most significant financial commitments you will make in your entire life. Be sure not to rush the process and to only commit to a decision once you are 100% sure it is the right choice for you and your family.

Mortgage

Home mortgage comes in a variety of ways, and you must make sure to understand the fine print. There is much more to it than the loan amount and payment terms.

Lender and estate agent

First and foremost, only deal with trusted lenders. You are potentially starting a long term payment commitment, make sure the institution has a solid track record.  

Keep in mind that your loan officer does not work for you. You are just another client, his main priority is to defend the interest of the institution he works for. 

It is impressive the amount of manual labor that goes around the home-buying process. People make mistakes. Always double check your mortgage rate with an independent mortgage calculator to ensure the numbers match.

Mortgage interest rate

When analyzing if it is best to buy or to rent a house, you must understand the mortgage interest costs. 

Renters, many times, spend a smaller portion of their income on renting than owners pay as mortgage interest. In both cases, you will lose the rent and interest money forever — therefore, the need to watch how much interest you will pay when buying a house.

Transactional costs

When buying a house, you usually incur high transactional costs, much higher in fact than when renting. When thinking if you should buy a home, make sure to factor all transactional fees and taxes.

Maintenance costs

Each year in American pay as maintenance costs about 1% of the value of the houses in their possession. Make sure to factor in repairs and maintenance on your costs of the homeowner. 

Renters, on the other hand, can get away paying much less as all the high costs are covered by the landlord.

Opportunity costs

Homeownership also carries opportunity costs. Just think about it, instead of buying your first time home, you could invest the same money somewhere else.

In recent decades housing has proven to be a good investment; that may well continue – or it may not. Capital locked up in a house could have made an even higher return if invested elsewhere. 

Real estate brings a feeling of comfort for many people because it is more palpable than other assets you can only see on the computer screen. Furthermore, even if housing markets are not stable and your house price devaluates, that will not affect your purchasing power or quality of life. 

Nevertheless, real estate is still an investment like bonds, stocks, or mutual funds. Put your money where you believe it is going to grow faster.

Mobility

Modern society is mobile. Opportunities shift across the globe, and you are willing to make the best of your career, chances are that you will need to relocate at some point in life. 

To commit for long term mortgage payments only makes sense if you are going to be living in the property during that time. The exception is if you are buying the house as a real estate investment.

Be careful if you are not sure that you will be living in the property for at least some time after the mortgage payment period is over. In this case, my advice is to look for an investment with more liquidity than real estate.

Final take

What happens when you factor all this in? Take the example of the British housing market. In the run-up to the financial crisis of 2008-10, rapid increases in house prices and rising interest rates meant the user cost of owning rose well above rents. But over the long run, the two tenures have cost about as much as each other. This is as economic theory would predict. Renting a home, and buying the right not to have to rent a home, are economically equivalent actions.


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About the author:

Personal Finance Made Easy

Hi, I am Leblon Blue. Mid-thirties senior manager on a large corporation. Happily married for seven years and waiting for my first kid. I have dedicated my past 15 years to build an engineering background and a stable career. After working in Europe, Scandinavia, and Latina America, I am now based in the Persian Gulf, where I manage the performance of a large corporation that operates in the region.

Find more about Leblon Blue.

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