Your mom’s best friend’s second cousin’s husband, Fred, told your mom that renting a home is a waste of money. As you just got married, your mom passed on this valuable advice to you.
Not because Fred stressed that this is common and widespread knowledge means it’s true. When myths take hold, they create disciples who cling to them as sacred. Bury these seven housing myths that lead many folks to a life of perpetual debt.
1. Renting means throwing money away
Do you know you pay almost $100,000 interest on a $100,000 mortgage over 25 years at 6%? Paying interest on the mortgage, and paying property taxes on your house is like throwing away money, too. The opportunity cost of home ownership is huge; it’s the alternative to spending home ownership costs, such as property costs, repairs, maintenance, insurance, and so on.
Without a functional Capital Fund, and a down payment on the house that produces a mortgage that fits in your monthly budget, you are better off renting. A down payment that does not require mortgage insurance (20-25%) is a good base to start examining the home buying process.
2. You can get a mortgage less than your rent so you should buy the house
Watch out! This is a hook some mortgage brokers and banks use. Some put mortgage calculators on their web sites to suck you into easy, quick pre approvals. These calculators show only a portion of actual costs of owning a home. When you factor in additional home ownership costs you could end up with nearly twice your rental amount.
3. You can afford a mortgage as long as total debt payments are less than 40% of your income
You are unique; the bank does not know your attitudes, behaviours, or choices. This generic rule is meaningless to you. Your prime focus must be as mentioned earlier—ensure your mortgage and other home ownership costs fit in your budget.
4. All you need upfront is the down payment
You start with the down payment. Closing costs can be another 2-5% of your home’s purchase price. Home ownership costs include repairing the leaking roof, unblocking pipes, replacing the furnace, and other “emergencies”.
5. Buying a bigger house and renting a section is a good strategy
This is gambling; you are “betting” you will have tenants to help you pay your mortgage. Besides, if you do not fit conditions above, you have dug a bigger hole in which you will live a long time.
6. You don’t need a pension, you own a house
This reasoning has several problems. When do you sell your home to realize the equity? Suppose the market is significantly below what you expected? When and how do you invest those funds? Where do you live?
Your home is not an investment. If this is a strategy you wish to follow, why not rent, and invest the equivalent of home ownership costs above rental, regularly?
7. Adding student loans to your mortgage is a great way to repay your student loans
Repay your student loans before buying your home. Normally, your student loans will cost less than your mortgage. Besides, some governments have incentives to help repay student loans. Surely, you do not want to repay your student loan over 25-30 years at the mortgage rate.
Think deeply about money or finance ‘advice’ from the Fred’s. Before acting, check the facts–following financial myths will only sink you deeper in debt!
Michel A. Bell is author of five books, speaker, founder and president of Managing God’s Money, and adjunct professor of business administration at Briercrest College and Seminary. For information on Managing God’s Money, visit www.managinggodsmoney.com.
© 2014, Michel A. Bell
*First published on Managing God's Money blog on March 19th, 2014.