Conventional wisdom says, “Buy a house! It’s the American Dream!” Indeed, millions have found this works for them over the years … but many have also had the opposite experience.
In those cases, the people who don’t find home ownership to be practical, desirable, or financially prudent are folks who probably shouldn’t have bought a home in the first place. So the question becomes: How do you know if you’re ready to buy a house? And when is it clear that buying one could be the wrong decision?
The current home ownership rate among Americans is hovering around 64.2 percent — and has been in that region for several years. This is below the historic average and substantially lower than the most recent peak of 69.5 percent in 2004.
Although buying a home apparently makes sense for the majority of the population, the 35 percent who choose instead to rent may be on to something.
At Green Residential, we’re huge proponents of home ownership. But we also recognize that it’s not something everyone needs to do in their lives. Here are some factors that, when they’re present, would incline us to encourage you not to bother.
Not all debt is created equal. There’s good debt and bad debt. A house with a mortgage is generally regarded as good debt, as opposed to such things as credit cards and car loans, which are more often classified as forms of bad debt.
If you currently have a lot of bad debt, this is not the time to take on any new financial obligations … even “good debt”! Right now, you need to focus solely on aggressively paying down your existing debt.
Every last penny you can squeeze out of your monthly budget should be going toward repaying the principle on whatever you owe. Buying a house will only delay your ability to pay off your other responsibilities, and it will entail greater interest charges and worsening credit.
A house doesn’t take care of itself. It demands upkeep and maintenance. This means it also requires time and attention.
If you travel frequently — whether for work or pleasure — you probably won’t have enough time to address duties like mowing the lawn, pruning bushes, collecting mail, and using appliances and plumbing systems often enough to keep them functioning smoothly.
As a rule, you should be in your home at least 50 percent of the time. In other words, if you’re regularly out of town for 16 days or more each month, it’s simply not economical for you to own a house.
Will buying a house make you “house poor”? In other words, will you spend so much on the mortgage that you’re forced to cut back on basic necessities and comforts in other areas of your life?
Other financial gurus are willing to accept a less conservative benchmark, but financial expert Dave Ramsey suggests spending no more than 25 percent of your take-home pay on a 15-year, fixed-rate mortgage. So, for example, if you bring home $6,000 a month, your maximum mortgage payment should be $1,500 on a 15-year, fixed-rate term.
Although a bank might approve you for a loan that requires you to put only 3.5 percent down in cash, this isn’t a great idea for most borrowers. The lower your down payment, the higher your monthly payment.
If you can’t put down at least 20 percent in cash, you’ll end up paying for private mortgage insurance (PMI), which instantly makes your cost of ownership more expensive.
“PMI typically costs between 0.5% to 1% of the entire loan amount on an annual basis,” Investopedia explains.
“You could pay as much as $1,000 a year — or $83.33 per month — on a $100,000 loan, assuming a 1% PMI fee. However, the median listing price of U.S. homes, according to Zillow, is $279,000 (as of Feb. 28, 2019), which means families could be spending as much as $233 a month on the insurance.”
You’ll have to make your own decision, of course, but try to get as close to 20 percent as possible. If you can afford to put down significantly more — such as 50 percent — go for it!
Remember, the goal is to keep your monthly payment as low as possible so you have enough margin to live a comfortable and generous lifestyle.
Do you feel like your job security is questionable? Are you a freelance worker who sees dramatic fluctuations in income? Are you thinking about pivoting careers?
If you answered yes to any of these questions, now is not the time to buy a house. Wait until your general situation is more stable.
“If your main objective is to put a roof over your head, consider whether it’s smarter to rent than to buy,” real estate expert Elizabeth Weintraub writes. “In some real estate markets, it can be a bit of a stretch to meet the financial obligations of homeownership, while rents in those areas are 50% lower than a mortgage payment.”
Again, it’s just a general rule, but if renting in your area pencils out at 50 percent less than owning a home, then you should rent. This should enable you to save cash and prepare to make a larger down payment when homes become more affordable.
If you’re already stressed for other reasons, then adding homeownership to your list of responsibilities won’t be doing yourself any favors. If you continue renting for the time being, you won’t have to worry about repairs, maintenance, landscaping, and everything else that’s a feature of owning a house.
If you’re unsure about what to do or how to proceed, please feel free to contact Green Residential at your earliest convenience. Our experienced team of real estate professionals understands the details of buying and selling homes, and will never pressure you into making a decision that goes against your best interest.
We’ll speak openly and honestly about your situation and assist you in making a choice that sets you up for long-term success.
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