Friday, February 5, 2010

An alternative view on home buying.

I very much doubt this article would have been written a few years ago during the go-go times, when everyone was convinced buying a home was the best thing since sliced bread.

A few points for discussion:

A big reason that individuals and families are encouraged to buy a home is the idea that it "forces" you to save. If you rent a place, you are told you are "throwing your money away." This statement really does not tell the whole story.

If you save the difference between what you might spend to rent a small place and what you might spend to buy a larger house, you are doing yourself a lot of good by saving. If there is a big differential, it could be wise to save the money you may be spending on a (larger) mortgage payment for a few years. This will also get you in the habit of saving and investing in the first place. This tends to dispel the "advantage" of buying a big house because it forces you to "save" more money by making you pay the mortgage. Just rent a smaller (cheaper) place, and invest the difference. Do you have the discipline to stick to your plan?

Not every American has to own a home. This is the American dream argument, that it is somehow the birthright of every American to be indebted to a house. The term "own your own home" gets thrown around quite a bit, but many Americans do not truly own their homes. The bank does! A mortgage is debt, albeit a tax advantaged debt.

Do you need a home? One of our longer term goals is to buy a home. We think it makes sense for us to move into a house when we have kids, but not really before. We don't need that much space (to buy and store more stuff...the usual result of more space), maintenance (one of the most underestimated costs of a home), or decreased cash flow (we pay a much lower amount for rent than a mortgage...this lets us adjust our budget as needed).

Many people just don't care understand that there are other options, and that just because you havn't put yourself in the most debt of your life for a non liquid asset with high frictional costs...doesn't mean you aren't cool! (In plain ol' English..."buying" a home is expensive, ties up a huge amount of your current and future earnings, and is always going to cost you to "get in" (buy) and to "get out" (sell) due to real estate agents/mortgage brokers/banks/fees/loan costs/increased maintenance/increased utilities/property taxes etc.)

If any of this makes you think twice about jumping in to a big monthly payment...good!

Find your own best answer!

If you're still this interesting piece from before the "Great Recession" hit!

Being a long term investor, either in a house, or in index funds, will likely lead you to more financial freedom.

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