Eliminating Credit Card Debt Advice

By Liz Pulliam Weston

If you’re feeling pressure to buy a home, you’re not alone.

Home prices are spiraling ever upward, indicating a demand that’s outstripping the available supply. Wait too long to buy a house, many people fear, and you could find yourself priced out of the market -- or at least out of the neighborhoods you like best.

Meanwhile, mortgage lenders are bending over backwards to give people money to buy homes. They’re allowing people to take on more debt or get loans with worse credit, than ever before.
But that doesn’t mean everyone should be a homeowner. It’s a bigger commitment and more expensive than most first-time buyers ever realize. You should have a clear idea of what you’re getting into before you commit to 30 years of payments -- and you shouldn’t let any of the following popular myths guide your decision.

‘A house is a better investment than the stock market’

It has become popular to tout homeownership as the new best way to build great wealth.
When, oh when, will we learn that past performance is no guarantee of future results?


It’s true that owning a home can be a good financial foundation, because it forces you to save (in mortgage payments that build your equity) and offers you the potential for great leverage. Leverage, simply put, is the ability to invest just a portion of the purchase price, borrow the rest and reap outsize rewards from any appreciation.

Say you put down $20,000 on a $100,000 home, borrowing the balance. If your home appreciates 10%, your equity in the home has grown by 50%. ($110,000 minus the mortgage of about $80,000 equals $30,000, or 50% more than you invested.)

Home prices, however, don’t always go up.

Ask homeowners in Boston, Dallas, Houston, Anchorage and Southern California -- all of which suffered major real estate recessions in the past 20 years.

After dropping more than 20% in the 1990s, Los Angeles home prices took almost 10 years to regain their peak, says real estate expert John Karevoll, an analyst with DataQuick Information Systems. Anyone who lived here during that time knows people who were “upside down” -- owing a bigger mortgage than the home could be sold for. Thousands of people simply walked away from houses they couldn’t sell, trashing their credit ratings in the process.

It’s hard to know, in advance, when you’re buying into a real-estate bubble. That’s why you should be relatively sure you won’t need to move anytime soon if you buy a home. Three years is probably a minimum, five years is better and 10 or more will help you ride out all but the worst real estate crashes.

‘I’m tired of throwing away money on rent’

You’re not really throwing money away when you send a check to your landlord. You’re exchanging it for a place to live. You’re also getting flexibility and freedom -- things you sacrifice when you buy a home.

When you’re a renter, it’s the landlord, not you, who is generally responsible for maintenance, repairs and fixing the toilet that blows up in the middle of the night. If the neighborhood should start to slide, or you get or lose a job, you can up and move with a few weeks’ notice (less, if you don’t mind losing your deposit).

It’s true that you may have to deal with rising rents and recalcitrant landlords. Homeowners, however, are often stuck with rising taxes and maintenance costs, as well as recalcitrant neighbors.

Moving is never fun, but moving when you own a home is an expensive, time-consuming process. Finding a buyer can take months in all but the hottest markets, and you should figure selling costs will eat up about 10% of your home’s value, once you add agent commissions and moving expenses.

In other words, homeownership is more like marriage; renting is more like living together. Make sure you’re ready to be wedded to a house before you propose to leave behind life as a renter.

‘I need the tax deduction’

Would you give someone a buck just to get 25 cents in return? That’s essentially what you’re doing when you take on a mortgage just to get a tax deduction.

If you’re in the 25% federal tax bracket, every dollar you pay in mortgage interest only saves you 25 cents in taxes.

Don’t misunderstand -- the tax break is nice, and you need somewhere to live. But you should make sure you can really afford to own a home before you take the plunge.

Remember that many of the real costs of owning a home aren’t deductible. Uncle Sam won’t give you a break for insurance, repairs or maintenance, for example -- and those costs can really add up.

Most homeowners should plan to spend at least 1% of their home’s purchase price each year on maintenance and repairs, says finance expert Eric Tyson -- and more if they plan to hire someone else to do all the work. Tyson, co-author of “Home Buying for Dummies,” recommends setting aside some money each month in an emergency fund. You may not spend the whole amount every year, but sooner or later a big expense will come along -- a new furnace or roof, for instance -- that will consume several years’ worth of savings.

If you fail to maintain your home properly, you’ll pay even more when it comes time to sell. Many buyers won’t even bid on a property that shows significant neglect. Even in hot markets, buyers are likely to ask for expensive concessions to pay for the repairs you should have been doing all along.

The best advice on the issue of whether to buy vs. rent remains the time-tested version: Buy a home when the timing’s right for you, when you can swing all the costs and when you plan to stay put awhile. That way you can ride out any downturns in the market and benefit from any appreciation while enjoying a nice and affordable home in the meantime.