For many, buying a home is a dream come true. In addition, home ownership is seen as one of the key factors in building wealth. Many go to the limit of their budget and often spend more than they would pay for rental prices. As a financial planner, Chloe Moore not only sees this again and again with her customers, but has also experienced it firsthand.
Early on in her career at the age of 27, she bought a house herself and was convinced that renting was a waste of money. After living in it for nine years, she decided to sell her house and reduce her living space. Today she prefers to live in a rented apartment again.
The real price of the dream home
Having your own home can be a lot more expensive than paying rent when you add all the costs together. When Moore bought her home, she made a three-and-a-half percent down payment and paid several thousand dollars in closing costs – such as real estate transfer tax, notary fees, and brokerage fees. According to Moore, a good estimate for the closing costs is two to five percent of the house value.
In addition to paying the mortgage, Moore was also responsible for personal mortgage insurance, property taxes, and homeowner insurance, which was nearly ten times the price of her previous tenant insurance. Depending on the amount of the down payment and creditworthiness, this could cost up to two percent of the mortgage.
In the USA, the HOA homeowners association also charges fees that were due upon completion. In addition, Moore paid annual HOA dues, which rose significantly in the neighborhood at the time. She was charged a special payment for the deferred maintenance of the shared properties. All in all, her mortgage (including deposit, property tax, and insurance) was 30 percent higher than her rent at the time. Of course, that didn’t include ongoing maintenance of the house.
Even the sale of her home could no longer make up for the costs it had previously incurred
As she moved in, the cost began to add up. Her house was twice the size of her previous apartment and had an open floor plan with lots of windows. This led to high ancillary costs in the peak times of the summer and winter months. Regular maintenance cost thousands of dollars each year and included yard chores, pest control, gutter cleaning, and air conditioning.
In addition, Moore also had to take care of some deferred maintenance and several repairs over the nine years. As a single woman, she has been financially defrauded several times, despite her best efforts to consider multiple offers and seek advice from friends. She paid thousands of dollars for bad work, and some had to be improved. Moore suggests that people who are still clinging to their dream of owning their own home should set aside one to two percent of their home value for maintenance and repairs every year.
When Moore sold her home in 2018, the sale price was just over $ 100,000 higher than what she had to pay for the mortgage. The property commissions and shutdown costs were just over $ 20,000. The financial planner said that the amount of money that she had spent in the nine years on the down payment, the closing costs and the maintenance of the house could no longer be financially balanced. The home’s appreciation averaged about three percent per year, which is close to the national average for real estate in the United States.
Moore is happier and less stressed in her rented apartment
Buying a home is almost always more expensive than the current life situation of your customers makes. Many would underestimate the real cost of owning a home. In addition, many of their customers spend years saving enough money to pay a deposit and losing the opportunity to invest. Some trying to avoid debt are tempted to use all of their extra resources to prepay their mortgage and fall behind building retirement capital.
As a tenant, Moore’s monthly expenses are very similar to the monthly costs of her former home. However, they are more predictable and straightforward because Moore only has a few bills to pay per month. When something breaks, she is no longer responsible for finding someone to fix it and there are no surprise bills. In addition, she has reduced her living space so that she no longer has to clean and maintain such a large room. Overall, she is more satisfied and less stressed.
One of the arguments for buying a home is that the rent is increasing every year. In contrast, the principal and interest on the mortgage remain the same year after year. As the home gains in value, property taxes and insurance are likely to go up too. But as the house gets older, so will the ongoing maintenance and repair work. There may be money to be spent on renovations over the years, which is not necessarily a good return on investment.
Build equity (and assets)
There are only two ways to build equity in a primary residence: paying off the mortgage and adding value to the home. Putting little or no money on a house and relying only on its appreciation is not a good strategy, according to Moore.
While some areas have seen more residential property appreciation than others, the national average in the US is three to five percent per year. With traditional mortgage payments, homeowners initially pay more interest than principal. It takes years to get to the point where you start paying off the capital at a better pace. In any case, one would have to stay in a house for nearly ten years before any significant equity can be built up.
While owning a home can be a great way to build wealth, it can also sabotage finances. One of the biggest financial mistakes Moore often sees is buying too many homes. Worse, having little or no savings after paying the down payment can lead to more debt. More debt means more fixed costs and more financial stress.
Buying a house only makes sense if the owners live in it long enough
The financial advisor would also have seen how people destroyed the equity of their house while refinancing. When the home equity is reduced by cash refinancing or the home equity is used for debt consolidation, the home will make it more difficult to build wealth. Even if you refinance to lower the interest rate, the repayment cycle will start all over again and most likely extend the loan term. When the closing costs are factored into the loan, the homeowners end up with a higher mortgage balance.
So building equity in a home can help build wealth, but it only works if homeowners stay in the home long enough for it to increase in value and if they don’t go into debt against the equity.
Moore encourages customers to buy a home if they are willing to live there for at least seven years. Everything below that, and your equity, could be lost through real estate commissions and closing costs when selling.
Home ownership has to fit the lifestyle
Moore recommends setting up a solid emergency fund in addition to the savings needed to buy the home. Healthy home buying finances can save you a lot of unnecessary stress and worry. A low debt-to-income ratio and good credit are a must, according to the financial advisor.
Potential homebuyers should also be able to save at least ten percent. A down payment of 20 percent is ideal to avoid high homeownership costs, but 10 percent allows you to buy a home with a little equity and shows that you are financially prepared as a homeowner.
Home ownership should, however, suit the lifestyle and needs. When people start families, have pets, build their own home, or want to feel settled, Moore says home ownership is a good choice.
Owning a home doesn’t really add to your financial wealth
Home buyers should be prepared for the responsibility of owning a home. According to Moore, this is not for the unprepared or weak of heart. Condominiums and townhouses require less maintenance than a single-family home, but they also come with a certain amount of responsibility.
Now that Moore is older (and wiser), she believes that buying a home should be more of a lifestyle decision than an investment decision. Investing provides income or add value over time, while a primary residence requires continuous cash flow to maintain. Renting gives her the opportunity to save and invest more. She will probably own a home again at some point, but no longer own a single-family house. In the meantime, she’s enjoying a stress-free – and predictable – life as a tenant.
This text has been translated from English. You can find the original here.