Buying a house is one of the biggest financial decisions of life. So it’s odd that we usually approach this weighty issue, not with sound financial logic, but with human emotion and pride. All too often, home ownership has less to do with our need for shelter than it does with our need to keep up with the Joneses. Houses become status symbols of stability, success, and prestige.
Of course, we’d rather not admit that we are such petty people. So instead, we justify ourselves with excuses:
It’s the prudent thing to do. Renting would be throwing money away. I’m building equity. I need a larger house. I deserve it.
For a short while, we indulge. It’s only later that we find ourselves suffocating under our financial burdens.
Most of us would be better off renting. It hurts to throw away money on rent, but giving your money to bankers isn’t much better. Since the average homeowner can’t afford to purchase a house outright with cash, he’ll take out a mortgage loan instead. The bank will expect the principal to be repaid with interest each month for the next 15 to 30 years. This sounds awful similar to renting.
One key difference between mortgage and rent is that mortgage payments are more expensive. While houses might be cheaper than apartments per square foot, houses are also far larger. The net result is that mortgage payments can be double the price of rent. So you never save money with a mortgage; you’ll only get more space per dollar. What’s worse, all those empty rooms might tempt you to fill your house with clutter.
An often-touted benefit of home ownership is that it locks in your cost of living. Whereas rent payments increase over time, mortgage payments remain fixed. Yet this fixed, permanent nature of a mortgage is also its greatest drawback. It’ll be hard to start a new career, launch your own business, or travel when you have 30-years worth of payments to take care of.
Finances could become a nightmare. You’ll be forced to stick with your job, like it or not, because of your house. Suddenly, the threat of losing your job during an economic recession can make you panic. Getting laid off could send you into depression. By renting, it’s possible to move in with relatives until you find new work. It’s a humiliating prospect, but the alternative—foreclosing your home and declaring bankruptcy—is a lot worse.
The average homeowner would be better off investing outside of real estate. Without previous experience, you probably won’t be getting great returns on your house. Instead, you can take the downpayment on an expensive house and invest in what you already know. Rather than depending on the advice of a self-interested agent, you could use your actual skills and talents to build wealth.
So before you start searching for a potential house, consider if you need one at all. Not buying it at all might be the most prudent decision you could make.