The Biggest Mistakes of All when you Buy a House
We didn’t buy. We were afraid of making a mistake.
LESSON: Educate yourself. Don’t let fear block you from home ownership.
Kyle and Shannon Marks have been shopping for a home for more than two years. Yet, they continue to rent. Every time they get close to an offer, their worries overwhelm their ambition. “You can never be too cautious,” says Shannon. “Our home will probably be the biggest investment we ever make. We certainly don’t want to make a mistake.”
This section has emphasized the need to anticipate and prevent mistakes in homebuying. Homebuying has become more complex, and you must step around roadblocks. Nevertheless, the biggest mistake is to put off becoming a homeowner because you fear you will make a mistake. Educate yourself. Shop the market. Get reliable advice from people more knowledgeable than yourself. Then commit.
You can sit on the fence forever and watch the parade go by. In the words of singer Billy Ray Cyrus, “dreams move on if you wait too long.”
What Fears Are Blocking You?
“We could afford the house, but the concerns are, what about the future?” says John Schultz. “What if the roof caves in? Oops, you’re repairing the roof. Do you have the money to support that?” he adds.
Luis Arroyo feared paying too much. “At first I was wondering if the property was actually worth what I was paying,” says Luis. “I kept asking the Realtor, ‘Are you sure I’m not overpaying?’ ”
Terri Faber is worried about whether to buy a single-family house or a condo. She’s not sure whether now is the time to buy, or whether a lender will approve her loan. “Although I’ve got a good job and savings,” says Terri, “who knows what could happen tomorrow? Maybe the bubble will burst. Besides, some of those neighborhoods give me doubts.”
Do these fears apply to you? Do you want to own, then back away? You’re not alone. “There are people,” says Realtor Susan Swift, “who will run you around looking at 150 different houses and keep telling you, and themselves, they are looking for the perfect thing. But they are really afraid.”
The Risks of Renting
It is odd that so many renters worry about the risks of home ownership. They do not realize that continuing to rent presents even greater risks. What if interest rates go up? That could cost you tens of thousands of dollars. What if home prices go up? That could cost you tens of thousands of dollars. What if rents go up? That could cost you thousands of dollars. And if you continue to rent, what about the tens (or even hundreds) of thousands of dollars you will lose in home equity?
The costs of repairing a roof, overpaying, or choosing the wrong home or neighborhood pale when compared to the risks and losses of continuing to rent.
Imperfect Home Ownership Beats Perfect Renting
Exercise caution and good judgment. Investigate alternatives. But to get ahead, you must move from the rational and cautious to that leap of faith. To fear mistakes is itself irrational. As decision expert Theodore Rubin points out, no decision is perfect. A successful decision results not from the decision itself. It results from your commitment to make the decision work for you.
“If I compare my house to an imaginary dream house,” writes Dr. Rubin, “my house comes off poorly and I destroy my chance of enjoying it. If I compare my house to houses that actually exist, it may come off well in terms of any real specifications a home requires to be comfortable. This is a true luxury, one I can appreciate in reality.”
Fear of Commitment
People who fear to buy fear to commit. They say they’re holding out for a home that has no flaws, no shortcomings, no drawbacks. But they know such a home doesn’t exist.
If you are caught in that trap, steer back onto the right course. Answer three sets of questions:
1. Have you really thought through and ranked your priorities? Have you discovered your most important feelings and values? Are you permitting the opinions and views of others to conflict with your priorities? You can’t have it all. You can’t satisfy everyone. Focus on what’s important to you.
2. Do you compare houses and neighborhoods with an open mind? Have you explored options and possibilities? Have you educated yourself about alternative home finance plans, neighborhoods, types of homes, and price ranges?
To exercise good judgment, view what the market offers. Put your creativity to work. Don’t let wishful thinking push aside market realities. But also don’t accept fewer choices than you actually have. Education and creative thinking can go a long way toward reducing your fear, anxiety, frustration, or disappointment.
3. Do you see possibilities and options as problems or opportunities? Fear creates negative thinking. Negative thinking mires you in anxiety and hopelessness. You may think, “We’ll never be able to find what we’re looking for.” Or you tell yourself, “We can’t find anything we like that we can afford.”
Fear and negative thinking go together to block your ability to create choices, options, or possibilities that could work for you. You may resign yourself to renting—or you could jump into a decision just to get it over with.
When you frame your options in positive terms, you develop self-confidence. As you develop a here’s-what-we-can-do attitude, you turn fear into eagerness and excitement. Whereas fear generates avoidance, a positive outlook helps you see opportunity and commit to action. Not only will you make a good decision, through commitment you will make that decision work.
We thought it over. We’re going to continue renting.
LESSON: Experience proves that continuing to rent is the most costly mistake you can make.
Over the years, hundreds of newspaper and magazine articles have cautioned against buying a home. They persistently try to make the rent vs. buy decision a complex calculation. Financial planners routinely say, “Buy a home as a comfortable place to live, but owning is not for everyone. You’ll earn a greater return in stocks.”1
Biased nonsense. Apart from the fact that naysaying “experts” have been wrong in their warnings against buying for 60 years, a review of four powerful reasons shows why home ownership beats renting:
- Laws favor home ownership.
- Home ownership produces the safest and surest opportunity to build personal wealth.
- Over the course of a lifetime, Americans who own will spend far less money on housing than those who rent.
- Home ownership yields transcendental benefits that far outweigh financial returns.
Laws Favor Homeownership
You can deduct mortgage interest payments from your taxable income. This deduction—which is not available to renters—may save you thousands of dollars a year in income taxes. In addition, once you begin to build home equity, you will never again pay the high nondeductible interest expenses charged on credit cards, auto loans, and other consumer debt.
Why? Because as a homeowner you can arrange a low-interest-rate home equity loan (tax deductible, no less) to cover your essential borrowing needs (new car, kids’ college education, starting a new business). Plus, as you sell one home to trade up to another, only profits in excess of $500,000 ($250,000 for singles) will be taxed. You certainly can’t buy and sell stocks with this tax benefit.
What happens if at some later time you hit a financial tragedy (e.g., bankruptcy, creditor judgment, lawsuit damages)? Again, home ownership helps protect you from total loss. In nearly every state, homeowners get to exempt part or all of their home equity from loss to creditors, judgments, or bankruptcy. (Even the IRS rarely goes after home equity to collect unpaid income taxes.)
This benefit is called a homestead exemption. In a few states this exemption is as low as $5,000 to $10,000. In others it ranges between $25,000 and $100,000. And in Florida and Texas, 100 percent of your home equity is protected—even if it amounts to $1 million or more. (The new bankruptcy bill continues to protect home equity, but it only applies after several years of ownership. This restriction attempts to prevent debtors on the brink of financial collapse from transferring all of their available assets into homeownership, thus escaping at least partial repayment of the debts.)
Build Personal Wealth
Building wealth through home equity has consistently proven the safest and surest route to a personal net worth of six figures or more. When you combine a decreasing mortgage balance with even modest rates of home appreciation, your wealth multiplies.
Homeowners Spend Less for Housing than Renters
Homeowners not only build more wealth than renters through home equity, they also accumulate higher net worths for another reason: Homeowners spend less for housing than renters. Although the exact cost advantages will differ among towns and cities throughout the United States, over time rents continue to increase as mortgage payments remain the same (or maybe even drop through refinancing). After your mortgage is paid off, your monthly payments fall to zero.
This cost advantage of owning means that as homeowners grow older, they have more money left from their paychecks after paying for housing. So, they’ll have more money to invest.
If homeowners invest an average of only $1,000 a month of these cost savings, say over years 10 through 40, they will accumulate (assuming an annual return of five percent) approximately $675,000. That extra wealth adds to the equity they have built up in their homes.
Housing cost savings that homeowners enjoy as they grow older give them a powerful advantage over renters in their ability to generate personal wealth and create a diversified investment portfolio. But don’t just accept these figures or even the results of the aforementioned Harvard study at face value. Test this conclusion for yourself. Compare the wealth position of long-term renters and homeowners you know who have reached their 40s, 50s, or 60s. The net worths of your older friends and relatives who own their own homes greatly exceed the wealth of those who have remained lifelong tenants.
Home Ownership Yields Transcendental Benefits
“Hey, we own this. This home is ours,” says Melanie Watts. “We never thought of our home as a money machine—although our equity has steadily built up and our payments are lower now than when we bought 12 years ago. We became homeowners because we wanted the good feelings you get when you own instead of rent. I can’t describe it, but it’s real.
“After owning our own home, I don’t think we could ever feel comfortable again as tenants. In fact, we soon plan to buy rental houses and let our tenants put their money into our retirement fund.”
“What I’m saying,” Melanie continues, “is that the financial returns of ownership are great. But the most important benefit of owning is ownership itself. There’s nothing like knowing a small part of this big old world belongs to you.”
“Ownership gives me feelings of security and comfort. When I rented I never felt in control of my life. Now I do. To us, home ownership and ownership of property is a transcendental experience. I’m not into Zen or anything like that. But anyone who rents is missing one of the best feelings they can have. Although we intend to own income properties and will need tenants, I still believe most people who rent are making a big mistake.”
History shows Melanie is right. Putting off home ownership remains the most common and most costly mistake of all.