My Stance on Renting
Everyone seems to think that I am opposed to buying a home. Almost every fan of the blog that I talk to seems astonished when I tell them that I am very much in favor of people buying homes.
So, let me clarify again my position on renting versus buying.
In my opinion, far too many people (particularly first time home buyers) jump into buying a house because they can’t bear to “waste any more money on rent.” These people have a very valid point. Home ownership provides equity appreciation on the home, which in the large majority of cases will far outstrip any return you could earn in a savings account. This makes buying a home a generally good investment, and certainly can provide much greater long-run results than renting.
I am concerned, however, that first time homebuyers rush to buy before they are financially prepared. Home ownership is much more expensive than renting. You have to pay for hazard insurance, property taxes, repairs, upgrades, and (for first time homebuyers) mortgage insurance. These extra expenses can stretch a family’s budget far beyond what they anticipated when they bought the home. Many of the families who are losing their homes to foreclosure are young couples just starting out. In their desperation to avoid wasting money on rent, they overextended themselves and eventually lost their home.
After losing the home, how much better off are they? They get no equity, pay tons in interest and taxes, and any work they did on the house is pure loss. It’s financially devastating to be foreclosed on. Many families could avoid that if only they would take their time, research the un-told costs of home ownership, and go into the deal with their eyes open. Any financial decision you rush into headlong is susceptible to catastrophe. With a decision this large, potential homebuyers cannot afford to be hasty, because the consequences can be dire.
I think that it is perfectly fine for a family to rent an apartment or small home while they build their financial strength. Once their situation can support the mortgage EASILY, they ought to buy their own place and start up the equity ladder. You must only enter a mortgage if you can have a little extra room in your budget. Don’t stretch to the absolute maximum of your budget to buy the home, because you will find yourself overextended. You have to prepare for unexpected expenses and costs.
Lastly, I am hugely opposed to mortgages. Investment leverage is the only good thing I can think of about a mortgage. Everything else about them is terrible to your finances. A HOME is a great asset: a MORTGAGE is a great burden. Your mortgage is at least DOUBLING the cost of your home over 30 years. Just imagine all that your mortgage is costing you, and how strong your finances could be without that mortgage payment.
Of course, renting does not provide the option of eliminating your housing payment at some point. When you buy a place, you can pay off the mortgage and someday be rid of your housing expense completely. When you rent forever, you pay forever. That’s why I don’t support the idea of long-term renting. If you can pay off your mortgage in less than 30 years (and I can teach you how to get rid of your mortgage AT LEAST 7 years sooner without any extra cost to yourself), then you will have some time to really sock away some money into savings.
I hope that clarifies my thoughts on renting versus buying.
Posted on 20 Apr 2009