With house prices and interest rates so low, it’s almost a dumb idea not to buy a house in the near future. If you can fit it into your budget and still allow yourself some room to save, it can be a good investment for you and your family.
Not only do you get to experience the benefits of home ownership like tax breaks, not sharing walls with loud and smelly neighbors, and having more space to live and play, but the value of your home is almost guaranteed to increase if you own it long enough.
Also, if you are able to get a million dollar house for $50, then it’s probably worth it.
There are times, however, when buying a home can be a bad choice. It all comes down to whether or not you can really afford it.
Can You Afford A House
My mortgage payment is just shy of $1,400 including all the necessary private mortgage insurance and taxes. I can comfortably afford this amount while still managing to save a good amount of money every month.
If I wanted to, I could live in a house that is more than twice as expensive and still be OK, but I would be living paycheck to paycheck and on the cusp of disaster with no money in savings and no emergency fund.
You Just Can’t Afford It
Below are a few examples of times in which I would advise against purchasing a home.
I was in a cafe the other day masticating some delicious broccoli and cheddar soup with a warm and inviting baguette. A man seated himself in the nook in front of me, directly perpendicular to my table. He slid a 9″ x 12″ manila envelope onto the table and sat waiting.
Minutes later a woman came in and excitingly sat down across the table from him with her two quiet kids. He immediately took out what was in the envelope and she began signing.
After listening to her talk for just a few seconds, it became clear that she had bought her first house and was now signing loan documents.
I thought back to when I bought my home and felt a sense of shared happiness with her as she signed the paperwork, until she opened her mouth.
“I just found out that the lease at my apartment is 13 months and not 12, so I have to pay an extra months rent even though I won’t be living there. I’m not sure where we’ll come up with the extra money for the down payment because we needed that money really bad.”
Hearing her say that wasn’t all that bad. After all, I gambled on the purchase my first house and put down almost all the money I had because I knew how much I’d be making in the coming months, and even if that changed, I knew I had the capacity to earn enough to support myself in other ways.
Then I heard it. $320. The rent at her apartment was $320. She was going to come up short on her down payment for a house because she had an unexpected expense of $320.
I don’t know the cost of living in a lot of other places, but here, a cheap, old apartment in a complex where there have been multiple shootings is no less than $550-$600. God only knows where to find an apartment for a family of four (she also mentioned her live-in boyfriend) for $320.
I’m not putting people down because they can’t afford a more expensive apartment, I am just saying that she was demonstrating some extremely poor financial planning skills. The point being that if $320 puts you in a position where you question whether you can make the payment, then you should not be buying a house.
This may seem obvious to some people, but it clearly wasn’t obvious to this woman, so I feel like I have to mention it.
Now that I’ve made an example out of one poor, unsuspecting lady, I will share the mistake I made when I bought my first house.
I had been dating my then girlfriend for over a year and was ready to propose, but I wanted a house first. For some reason it had to be house before marriage, which I still think is ideal since saving up for a down payment and setting a foundation for financial responsibility is easier when you are single.
I looked at about 15 houses and had a couple in mind that were worth putting an offer on. One of them went into escrow before we even submitted our offer, so the automatic choice was the last remaining property.
After three rounds of negotiation with the bank on the foreclosed property, we struck a deal 15% below market value and closed 28 days later.
It all sounds like a pretty good deal right?
The problem was that I didn’t even consider living in an apartment first. Having never owned one before, I had underestimated the amount of random expenses that a house entails, so was not as financially prepared as I had hoped.
I have never been late on a mortgage payment and plan to keep it that way, but I wasn’t able to save much at all for a whole year.
Here we are now, two years later, and although we are not upside down on the house, it depreciated slightly before leveling off. It was just a few months ago, after working to create some new income, that I began to feel comfortable with the payment we make every month while still being able to achieve our savings goals.
If we had lived in an apartment for a while first after getting married, we likely could have found an even better deal, and saved up enough towards a down payment to eliminate any PMI expenses. Just because you can afford a house doesn’t mean that now is the right time to buy one.
We actually moved into an apartment for six months to save an extra $900 a month, but if we had started there in the first place it would have been much less of a hassle.
I love our house and am happy we have it, but by being more patient and logical in my thinking, we would have come out slightly ahead of where we are now.
Some people buy property counting on it to increase in value over time. The notion that property will continue to appreciate given a long enough period is actually a well accepted practice.
We have all heard the story of a friends grandpa who bought a house for $20,000 in 1960 that is worth over $200,000 today. You might think that a 900% return on your investment is astronomically high, but consider the following.
If you invested $20,000 in 1960 with a measly 7% average growth rate, you’d be sitting on about $589,140.50 right now, more than double what the house is worth!
Granted, not everyone has $20k sitting around, but if you are buying a house solely for the purpose of reselling after it increases in value, you should consider other options. Your home should provide value to you while you live in it, otherwise you are actually losing money standing by and waiting for it to appreciate.
Yes you can make some cash by renting it out, but the cost of maintenance and renovations as well as the hassle of being a landlord will likely lower the net amount of money you can make while renting out a residential property.
So…Should You Buy A House?
To recap, buying a house can be a bad idea if:
- You can only scrounge up enough money every month to barely cover your mortgage payments. Your mortgage payments should be closer to 25%-35% of your gross monthly income, or better yet, 25%-35% of your net monthly income.
- You are making the decision based on impulse and emotion. Home ownership can be very enticing emotionally, so it’s very important to consider your options from a logical and factual standpoint before getting attached.
- You are banking on the fact that it will eventually earn you money. Investments can make or lose money, so you should remember that as with any investment, it may not turn out the way you hope, so don’t put all of your money into something if you aren’t comfortable with the idea of losing it.
What other reasons can you think of to hold off on purchasing a house? Looking back on things, do you wish you had waited to buy yours? Leave your stories in the comments for other readers to learn from.