By in Debt, Real Estate

“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?
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