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Is Homeownership Still a Smart Choice?

Building equity is the traditional way of safe saving, but make sure the math works, given your economic realities.

Let’s do some numbers. When you buy a house, you typically get a 30-year mortgage. Right now, interest rates are around 3 percent, the lowest in decades. 

What that means is that you can afford “more” home, because you pay less per month in interest than in previous years. Note, however, that just because you can buy a pricier home doesn’t mean you should. 

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Dangers of a Slow Market

Let’s assume, for the sake of illustration, that you buy a home in a place where prices remain pretty static from year to year, like Harding, Ark. Let’s say home values increase by 1 percent during your first 12 months as owner.

In the first year of a new home loan for $300,000, at 3% interest, you will pay $8,227 in interest. Your home increased in value by $3,000. That means that if you sell your home after one year, and you don’t account for other costs such as taxes, insurance, and repairs, you won’t build any wealth at all. In fact, you’ll lose $5,227. 

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DIY renovation, contrary to what you see on HGTV, is fraught with unpleasant and costly surprises, especially if you’re learning as you go from YouTube videos. Before you buy a fixer-upper, evaluate how much money and life energy you will spend to make it your own.

Add in those other house ownership costs, plus the closing costs associated with getting the loan, and you start your homeowning experience tossing about $10,000 into a money pit. But it’s not that simple, right? When you paid rent, you were doing the same thing. Maybe you were spending $1,200 a month, or $14,400 a year, to maintain somebody else’s building.

The point is, because of the location and type of home you bought, you’re playing a very long, slow game toward saving money. And during this time, you’re at risk: risk that you’ll need to do major repairs on the building. 

As time goes on, your prospects for saving get better. Your interest payment typically declines with the age of the loan, but at 3 percent interest, you’re still looking at about 10 years before you begin to pay more toward the actual cost of the home (the principal) than you do toward interest. 

Beating the Odds

Now let’s look at a different scenario. You buy or build a home in a desirable area, where home prices tend to appreciate rapidly, such as Fort Myers, Fla. On top of the small pittance you can depend on from equity, you “gain” whatever value the market attributes to your property. In a high demand year, such as 2017, homeowners can see a rise in the value of their property by $10,000. The same has been true over the past year in many markets, due to turmoil created by the coronavirus pandemic. 

For anyone looking to buy a new house or condo or tiny home, that’s nothing to celebrate. It makes you feel like a small planet in a big universe after the big bang. Everything is rapidly moving away.

So what should you do? Wait until prices start to cool off again? Give up and move back in with your parents? Go live in the woods?

None of the above.

As I detail in the 2021 Home Buyer’s Guide, your success in purchasing a place to call home without crushing yourself with debt and responsibility depends primarily on roads NOT taken. You may need to rewire your brain somewhat.

The reality is that if you buy wisely, then the long-term financial pros do outweigh the cons. To illustrate, take a look at the chart below I created using the Buy vs Wait online calculator.

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What this data shows is that although it’s tempting to try to save a larger, 20 percent down payment on your new home, rather than taking on a larger loan now, you will actually end up spending more per month anyways. You’d be better off taking advantage of special financing to buy now with only 3 percent down. 

Financial freedom after buying a home is not automatic. You may have to defer a few of your bucket list items and toss some preconceptions. That means not buying a bigger house than you absolutely need. It means not buying in a lousy neighborhood, hoping it might get better. It means reading the fine print in your condo rules. It means doing your homework before you buy an older home. It means not sweating the small stuff (“I hate the bathroom tile”), when the big stuff is looming like a gargoyle overhead (“that roof needs replacement”).

On top of all the building science you need to know, you want a house that lives up to your values, with high-performance green features, one that crushes operational costs down every month. The better built your housing, the smaller your lawn, the bigger your solar array, the less of your money pours into “feeding” it. 

Before we get deeper into how you can find and afford the type of housing that’s right for you, let’s get to the real heart of the matter. Where do you belong? Download the guide to get started on your home buying journey