Episode Summary:
In this episode, we discuss the benefits of renting vs. buying a house and if you should buy a house just because interest rates are low right now. We start with a voicemail from a listener and discuss her question about buying a home for the first time. There is a lot of pressure on renters to buy homes right now, but it’s not unique today. There is always pressure on people to buy homes like buying cars and clothes and everything else. So we dig into how first-time home buyers and all buyers should evaluate their decision to purchase a house.
Episode Notes:
Buying a home to live in is a lifestyle decision, not an investment decision. The industry wants to make you believe it’s a wise investment decision, but that’s apples to oranges. But buying a home can be one of the best decisions of your life. Here are some of the non-financial reasons to buy a house.
- Safety
- Schools
- Beauty
- Space
- Quiet
- Proximity to things of importance
- The intangible of having it be “yours”
- Renovations!
But don’t pick those things because you want to impress other people. If you have 2 kids, you don’t need 8 bedrooms. Buying a home is a lifestyle choice, so make sure it’s YOUR lifestyle, not someone else’s.
Let’s talk about the market. Interest rates are low and the listener says, BUT, they’ve been low for a while. They were also super low in 2012 when I bought my first house. So don’t sweat it too much. The people who tell you that the time is now are likely the ones selling you the mortgage or hearing that narrative from the banks.
To understand how interest rates work, let’s discuss mortgages work:
- You put some skin in the game with a downpayment, typically 20%. If you put down less than 20% you often have to pay PMI, or private mortgage insurance. PMI costs between 0.5% and 1% of the mortgage annually and is usually included in the monthly payment. The bank lends you 80% to buy the home.
- You then pay the bank back interest and principal each month.
- You pay the % interest on the balance on the loan. It can be SUPER expensive.
If you borrow money for a long time, you’ll pay more interest but less cash each month. A shorter loan is the opposite.
How much should you spend when buying a house? Don’t trust the bank! They don’t care about your lifestyle or your goals. They want you to borrow as much money as possible. So if they approve you for a $500K loan, do not borrow all of it.
In addition to borrowing costs, you have taxes, maintenance, repairs, renovations, not to mention new furniture, art, towels to match the tile, curtains to please your new aesthetic, it goes on and on. It’s expensive.
You might also make money on the property value, but you need to see the whole picture.
Mike and Maggie share the specifics of their own personal homes and what they’ve put into them vs. what they are worth, further supporting the theory that homeownership is a lifestyle decision.
Mike shared a quote from his book, “Whether you own a home or plan to buy a home, it’s better to look at the asset in terms of cost reduction, not future gains. You should be asking yourself, How can I buy and maintain this home for as little as possible.”
So should you buy a house? It’s a lifestyle choice. Is this what you want with your life? Are you willing to incur these costs?
Our Top 3 Takeaways:
- Buying a home is a lifestyle choice, not an investment choice.
- Buy a home for the right reasons.
- Expect to pay a ton of money over time, but if you pick a home for the right reasons, you’ll never regret it.