Common Cents # 32 - Buying A Home

 

Buying a home 

I have a friend who is in the process of buying his first house. It is an exciting time to finally own a place of his own. But what are the advantages of buying verses renting?

When my friend moves into his new house, he will suddenly be responsible for all of the utilities and maintenance. If he paid his own utilities at his apartment, they were almost certainly far less than in a house. The house is 58 years old and will require ongoing repairs and maintenance not required in an apartment, or a house that he would rent.

A big upside is the ability to nail down housing cost indefinitely. If he takes out a 15-year loan, his housing cost will be cut in half in 15 years when the mortgage is paid. Taxes, insurance, and maintenance continue, but the house payment will end when the mortgage is paid. If he continued to rent, the rent will almost certainly go up numerous times over the next 15 years.

Buying a house as an investment does not always work out as we might hope. We bought our first house in 1978 for $60,000. We sold it in 1995 for $100,000. Adjusting for inflation during that time, $60,000 in 1978 would equal $140,000 in 1995. The value of the house didn’t come close to keeping up with inflation. Since we made double payments and paid off the house in eight years, we lived there mortgage free for nine years.

We have only owned three houses, but the experience has been similar; the value has barely kept up with inflation if at all. The joy of owning our own home, however, and knowing that the cost is reasonably fixed for years to come can make purchasing a home a good idea. Being able to paint, remodel, or even upgrade the HVAC or appliances as we see fit is also very important but must certainly be planned for and budgeted.

It seems reasonable to buy a home if it is pretty certain to be able to live there at least three to five years. Any shorter period of time will probably not be worth the hassle and the costs associated with moving. Apply for a 15-year mortgage to avoid excessive interest and look forward to the day when all that has to be paid is the taxes, insurance, utilities, and maintenance. If those things add up to more than the rent on a nice apartment. It may be time to get out the calculator and consider cashing in.

But more importantly, we should not buy more house than we need. I remember my dad commenting about a friend’s house. He said, “That is a lot of capital to tie up just for a place to hang your hat.” We should not go nuts and into crippling debt just because the banker says we can afford the payment. Things change, our income changes, home prices go up and down. We can get stuck “over housed” and “under cashed”.

Our home, whether it is an apartment, rental home, or one we have purchased should not restrict or prevent our hopes and dreams from being fulfilled. Our needs and situation will likely change over the course of years; it’s a business decision that has a large impact on every other plan we make.  Choose wisely!