Home Buying: Rules of Thumb vs Reality - by Chris Cushman
A home purchase will often be the largest single acquisition of a person’s life. Do these rules of thumb apply to you?
1. Monthly Affordability - (RULE) Mortgage shouldn’t be higher than 28% of gross income (other versions include insurance and taxes not to exceed 32% of gross income; total debt payments not to exceed 40% of gross income). (REALITY) These are metrics that many lenders use to qualify applicants for loans, but many people can only afford less house because of other lifestyle choices. Discover your proper amount by looking at your short and long-term goals you’d consider important. Expenses and savings for retirement, potential kids, car replacements, trips, and house repairs will be hampered/sacrificed if you commit too much income to your house payment. Know what your priorities are today and in the future before you buy.
2. Wealth Accumulation – (RULE) Houses are good investments. (REALITY) Houses can help increase your net worth, but unless you’re a real estate professional or getting rent, they aren’t investments. Most people underestimate the cost of ownership, repairs and the depreciation of household items. House values generally appreciate, but the physical house itself depreciates. Also, no normal homeowner ever evaluates the cost of their time. Investors value their time. To be fair, renting certainly isn’t an investment either if you’re the one paying!
3. Timeline – (RULE) Only buy a home if you are going to be there 5 years. (REALITY) It’s possible for home to appreciate enough that 5 years isn’t required, but it’s hard to overcome all the closing costs (typically 2%-7% per transaction). Consider fees on both the buy side and the sell side. Appreciation is wonderful but don’t rely on it. Debt can decline around 8-10% over 5 years for most traditional mortgages and this can help make up for some of the costs.
Owning a home can be wonderful and usually benefits you long-term, but just remember that renting is the cost of freedom and less hassle! Call us and I’d be happy to help you run the numbers!