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MORTGAGE DEBT-ARE YOU READY TO BUY A HOUSE?

By in Debt, Real Estate | 19 comments

“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.”
-Ogden Nash (reprinted from Man vs. Debt)

Few get through life without any debt. My in-laws are the only ones I know who have never taken out any type of loan…. EVER. My father-in-law’s job included a car for awhile. When that benefit expired 15 years ago, he bought a Buick for cash and is still driving it today. They never purchased a home and pay their credit cards in full every month. They are middle class and I don’t believe the idea of taking out a loan ever crossed their minds. If something or some experience was too expensive, they didn’t buy it.

They were not miserly or deprived by any means. They loved the arts and went into New York City to see Broadway shows every year. They frequented the movies and restaurants for entertainment. They saved and spent money on what mattered to them. My husband and his brother were even sent to private universities by their parents, without taking out a loan and on a modest salary.

Is a Mortgage Loan Good or Bad?

Mortgage debt is fine most of the time. A mortgage loan used to buy a home is usually a good use of debt. Not only is there a possibility that the home will increase in value (appreciate) but the interest on the loan can be deducted from your income and lower your federal tax bill. In reality, when buying real estate, mortgage debt is a necessity as few have the funds to pay cash for a home.

Even though mortgage debt is generally considered responsible borrowing, make sure you follow these guidelines:

  1. Keep your your monthly mortgage payment is smaller than 25% of your monthly gross income.
  2. Do not borrow more than 90% of the value of the home (unless you take out an FHA Loan). In reality, you are much better off making a down payment of 20% of the purchase price of the home and borrowing 80% for the mortgage loan. Do not believe anyone who recommends taking on more debt than you are comfortable with. After all, you have to pay the money back, not anyone else!
  3. Do not take out a mortgage loan unless you are certain you’ll stay in the house or condo at least five years, preferably longer. We made this mistake once and it didn’t turn out well.
  4. Use a Buy vs Rent Calculator to figure out whether to buy or rent.
  5. If you already own and have not taken advantage of the very low mortgage rates today, go online and peruse current rates. Seriously consider this low interest rate environment to lower your interest rate. Refinance mortgage rates today before rates go any higher.

During the mortgage meltdown back in in 2009 to 2010, many unqualified borrowers were approved for loans. Their information was falsified and folks that never should have taken out a mortgage bought real estate, and lived to regret it. Mortgage debt is only okay if you can afford to make the payments, even if you have a financial setback.

When it’s Better to Rent

We bought a beautiful brand new home in a tony suburb of Indianapolis. After moving from the expensive San Diego region, our real estate dollars went much further in the less desirable mid west. Our new home was luxurious in comparison with our smaller attached home in California. We expected to stay in Indianapolis for a while, but later decided it was not for us. After securing employment elsewhere, we were charged with selling our two year old home.

We learned an expensive lesson when it came time to sell. Real estate was not appreciating very rapidly in price in Indianapolis. Our home was decorated quite modern in a region partial to country style. Long story short- we took a large loss in the sale of our home. In the process, we learned three valuable real estate lessons:

  1.  We should have rented, as we ended up living in Indianapolis for two years.
  2. When selling, stage your home to blend in with the style of the community. The community wanted traditionally decorated homes and our modern style made it difficult to sell our home.
  3. Don’t be greedy. We chose not to entertain our first offer because it was too low, and we ended up ultimately selling for less than was offered initially.

Our move to Indianapolis was an example where borrowing money for a mortgage loan was a bad idea. In this instance, we would have been much better off renting, instead of buying.

The Takeaway

Buying a house is only a good idea if it’s right for you. If you don’t want the responsibility of maintaining a home, do not buy a house. If you plan on moving around a lot, it’s better to rent. If you need to stretch to make the mortgage payments, avoid the purchase.

Only buy a home if you plan on staying in the area awhile. If you have a steady income and a large emergency fund, then you may be well situated to buy. Don’t automatically buy a home in the amount the bank says you can afford. You need to make the payments each month, not the bank. Personally, every home we buy has been for an amount less than we can afford.

Good luck with your decision to buy or rent and let me know how it turns out!

Can’t Get Enough Real Estate Debt Talk?

Where do you fall? Renting, buying, or undecided?
 
image credit; google images dreamhomedesignusa

 

 

    19 Comments

  1. The old question of whether you should buy or rent comes up quite often and still people make the wrong choice. I guess they think they the rules don’t apply! It used to be, if yo planned on living in an area for 5 or more years, it is better to buy. So much depends on circumstances! You could rent out your home if you remain in the area, but what if you have to move away? More questions than answers!

    krantcents

    July 14, 2012

  2. krantc-It is a really difficult decision today, especially because our society is so transient and our jobs are less stable. There are no easy answers, as you suggest.

    Barb

    July 14, 2012

  3. Barb! How can you say the mid west is less desirable….it’s a great place to live and the weather is so much better than southern Cal….variety change off between cool and hot, beautiful season changes, and we have wonderful lakes if you need that water experience.

    Sorry, but you hit a sore spot!

  4. @Marie-I’ve lived over half my life in the midwest, and it certainly has it’s advantages, not the least of which is lower cost of living. No offense intended, there are pros and cons of any area. In general, more desirable places to live have higher cost of living (supply and demand). Thanks for weighing in!!!
    @Jayson-Actually, escrow is just an account collected by the lender from the seller to pay for property taxes and homeowners insurance. Escrow or not, property taxes are a cost of home ownership. Thanks for bringing that point up.

    Barb

    July 15, 2012

  5. Thanks for including my link! These are excellent points about buying a home. I really do want to be a homeowner someday -but it’s still someday away.

    I’m curious, why didn’t your in-laws ever purchase a home? Do they live in NYC?

    Little House

    July 15, 2012

  6. Good points, but I’d like to add one more thing. If you’re a new home buyer, in some states you’re going to have to deal with escrow, which are taxes you have to pay along with your mortgage monthly, until you’re at least 75% through what you owe. And those taxes could be more than what you’re paying for mortgage. Just something else to think about.

    Jayson

    July 15, 2012

  7. Hi Little House, My in laws live outside of NYC in a 2 family home, owned by my mother in laws mother (El Carino’s grandma). It’s a nice set up living with family. 🙂

    Barbara Friedberg

    July 15, 2012

  8. If it weren’t for our mortgage, we’d have never had any kind of debt ever in our lives.

    However, I love being home owners (and having the control over our house), so having a mortgage is well worth it for us. I also love seeing that number shrink with each passing month!

    While renting would be less stress, it’d drive me bonkers to not be able to renovate things as I wish, or paint, landscape etc. as I wanted. Those things are our hobbies!

    Julie @ Freedom 48

    July 15, 2012

  9. Hi Julie,
    Clearly, you are well suited to being a homeowner. I agree that it’s really fun to renovate and update the home :).

    Barb

    July 15, 2012

  10. I live in Sydney Australia nd the cost of living is so high. We bought 6 years ago with the plan to stay for around 5, we are most likely moving at the end of this year.

    If we were only going to stay here a year or 2 renting would have been better, but we planned on staying. It is such a difficult choice to make.

    A few reasons I couldn’t rent again are my 3 year old is incredibly destructive and I would have to pay for repairs on a home I do not own and it would be tradesmen doing the repairs at a significantly higher cost than if I DIY.
    Also, I like the stability of owning my own home, not having it sold from underneath me etc. But that’s just me.

    Your posts offers great points, Barb.

    Kylie Ofiu

    July 15, 2012

  11. Buying a house is a dream for especialy new couples,but we must sit down to know all the responsibilities and aftermath costs of owning a house

    Kevin Ashwe

    July 16, 2012

  12. May be more people find themselves in debt because the noise on how easy it is to get a loan (debt) always rises above that of saving for years and being able to finally pay cash for homes, cars etc.

    Philos Mudis

    July 16, 2012

  13. Thanks for making the point that renting and owning are both good options, and that it depends on the person. Nothing makes me unsubscribe from a PF blog faster than when they proclaim that one or the other is ‘right’ and the other is ‘wrong’ when, clearly, everybodys circumstance is different. Thank you!

    Money Beagle

    July 16, 2012

  14. I knew you must have had some SoCal in you! For those of us in large markets like L.A. or NYC, saving up for a down payment can take a very long time. For a 20% down payment = 60K for a 300K home and that is a small 1 bedroom or condo.

    We won’t be buying anytime soon, but if we do our money would go much further in another state. Why do we live here again?…ah sun and sushi.

    Brent Pittman

    July 16, 2012

  15. You actually broaden my mind about mortgages and I really appreciate it. Selling and renting are both good. By the way thanks a lot for sharing your ideas here about mortgage.

    Danyelle Franciosa

    July 17, 2012

  16. @Kylie, Good luck with the move at the end of the year. Moving is really stressful, but hopefully there will be a good end result 🙂
    @Kevin, Philos, & Money, It’s a difficult decision to make, and definitely should not be taken lightly. The conventional wisdom that buying is better, is not so true today.
    @Brent, SoCal and many of the coastal locations requires lots of tradeoffs. With the cost of living so high, each of us (sushi?) has to decide if the financial cost is worth the price.

    Barbara Friedberg

    July 20, 2012

  17. Great comparison and make sure that your mortgage is low enough and the real property taxes don’t appreciate yearly.

    mari

    July 27, 2012

  18. @Mari-We have always bought lower priced real estate than we could afford. A definite stress reducer.

    Barb

    July 27, 2012

  19. It’s hard not to say that it’s a great time to buy a new home, and at the interest rates that mortgages are at right now I can’t see why this wouldn’t be a good thing for anyone thinking about buying a home, new or pre-existing. There are lots of great deals across the country that everyone can benefit from.

    Jason

    August 27, 2012

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