Buying a house is one of the most expensive, long-term financial commitments that many people make. But it’s not always the best decision for everyone as it requires hundreds of thousands of dollars. In this blog post, we will explore why buying a house might be a bad idea and what to do instead.
Article Overview
Buying a house is expensive
Buying a house is expensive. The average price of a home in the United States has doubled since 1999, with median-priced new homes now (2021) costing $374,900. But Of course, as with any purchase involving a lot of money, there are ways to reduce the cost.
Homebuyers can save on some purchases by negotiating some things themselves and/or hiring professionals to do others. For example, a buyer may be able to lower the purchase price of a home through negotiation or put money down for a professional inspection that could identify problems.
There are a lot of upfront costs with buying a house. These costs include the down payment, the mortgage fees, and moving costs. The mortgage fees are typically much higher than rent prices in most cities, so you’ll have to be prepared to pay them every month for years before you own your home. If you don’t have enough saved up or if you can’t afford these monthly payments, it’s not the best financial decision to buy a house.
No Diversification of wealth
When you buy a house, you are putting all of your eggs in one basket. This is not diversification at all, and you could do better by putting your money in something like Stocks, Index funds, or even gold and silver.
Stock investing is a better option, but the others are also viable. For example, investing in a mutual fund instead of buying a house will be less risky because you are diversifying your investments across multiple companies or funds.
Gold and silver investing is another good option to diversify your assets. Gold and silver have been used as money for thousands of years and can be very reliable in times of economic crisis such as inflation. This is why people buy gold when they anticipate an economic crisis.
You might think that you cannot afford to diversify your investments because it would be too expensive, but the truth is you probably cannot afford to not diversify your investments. Even if you can only put aside $100 per week for investing, it is still better than putting all your savings into buying a house.
Yes, there are tax benefits to owning a home, but the lack of diversification is not worth it. There are plenty of other ways to save money for the future without having to rely on just one investment.
You can compare the Dow Jones Industrial Average and Housing price sector index, for example, to assess your return on investment.
Buying A house will give you a Negative Return On Investment
Let’s say it’s going to cost you $400,000. And you will sell it after 5 years for $600,000. So now, let’s calculate our return after considering all potential expenses.
| Title search (at the land registry office) | $100 | |
| Recording fee | $150 | |
| Lawyer fees | $1,000 | |
| Insurance | ($400,000 * 0.5%)* 5 years | $10,000 |
| Maintenance (from second year) | ($400,000 * 1%)* 4 years | $16,000 |
| Property Tax | ($400,000 * 1%)*5 years | $20,000 |
| Real Estate Agent / Broker Commission | (600,000 * 6%) | $36000 |
| Land Transfer tax | (600,000 * 1.2%) | $7,200 |
| Mortgage Payment (Include taxes & fees) | $1850 * 60 months | $110,000 |
| Capital Gain Tax | (2,00,000 * 15%) | $30,000 |
| Total | $230,450 | |
So you will end up your journey with a negative rate of return, near about a 7.5% loss on your investment.
Well, forget about mortgage payment; say you are going to invest the total amount in cash. In that case, you will get a return of not more than 4% per year. On the other hand, the average return from the S&P 500 is about 10% – 11%. So buying a house remains a bad investment.
You can’t control your mortgage payments
It may seem like a great idea to buy your own house; however, you need to consider the mortgage payments. Before signing any papers or signing for a loan, make sure that you know what you’re getting yourself into and look at the facts about buying a house.
I’m not saying that you shouldn’t buy a house, but before making such a big purchase and taking on so much debt, it is best to know what you are getting into.
The first myth of buying a home or having a mortgage is that your monthly house payment will be cheaper than paying rent. This is false. Think about it. When you rent, you just pay for the place that you’re living in and nothing else. But when buying a house, your monthly payment includes not only the mortgage but also homeowners insurance, taxes, repairs, and other hidden costs.
Homeownership is not necessarily better than renting because of tax deductions on mortgage interest. Many people think that owning a house automatically increases their tax deductions, but this is not true because you cannot deduct the full amount of interest on your mortgage.
When getting a 30-year fixed mortgage rate, you end up paying more in total for your home than if you would get an adjustable-rate loan (ARM). Also, some mortgages have “prepayment penalties,” which means that you would have to pay a fine if you paid off your loan before it was due; this is an unexpected expense.
When looking at the monthly payments of different types of mortgages, fixed-rate loans are usually more expensive than adjustable or hybrid loans. If interest rates rise, borrowers on fixed-rate loans will not be able to refinance their loans because they have a fixed interest rate.
There are many hidden costs and expenses you need to be aware of before purchasing a home, so make sure that you know what you’re up to.
You’ll have to pay property taxes and insurance every year
Regardless of whether you own or rent, your housing expenses will probably take up about one-third of your income. But there are some additional costs associated with homeownership—like those pesky property taxes and insurance payments—that aren’t incurred by renters.
These costs can quickly add up to a significant amount each year, eating away at the equity you’ve built in your home and leaving less money to put toward other things.
It’s also important to note that property taxes and private mortgage insurance costs vary greatly from state to state, as does the amount of homes you can afford. You should consider these costs when deciding whether to buy a house.
For example, the average property tax in New York is about 1.925%, in California 0.8%, and in Florida, it’s 1%. This tax is applied to your property assessment value. So if we take the average property value of $3,30,000, you have to pay in-between $2700 to $6600 per year only for tax depending on the state you live in.
On the other hand, the average insurance cost is 0.5% of your property value. That will cost you each year about $1500 to $3300.
Hence in 9 years total, you have to pay $90,000 for property tax and insurance. That being said, $3,30,000 is a very conservative estimation for your purchase price.
A lot of money is required for repairs and renovation
Whether you’re buying a fixer-upper or moving into a pristine new home, the residence will likely require some patching up here and there. Although these costs may be minimal compared to building an addition on your house or refinancing your mortgage, they are still additional expenses that renters don’t have to worry about.
In addition, as your house ages, it will require more and more repair work—and you’ll be the one who has to pay for it. As a homeowner, you may also want to take on renovation projects yourself instead of hiring a professional contractor.
While this can save you money in the short term, you’ll have to invest the time and energy it takes to complete a job—and you’ll probably make some mistakes along the way. If your renovation isn’t done correctly, it may be costly to fix or even lead to problems that require further renovations in the future.
Renting allows you to save for the future
Renting allows you to save money for future investments like starting a business or investing in the stock market. Rather than owning a house which is an investment that usually won’t appreciate greatly over time, it’s better to save money in other investments where you can make more money.
Renting also allows you to ‘move with the market’ instead of trying to keep up with thousands of dollar mortgage payments. When interest rates rise, your monthly mortgage payment may also increase, leading to financial difficulties.
With the rent that you pay, you are saving for your retirement, not just buying an expensive house that will be worthless when it’s paid off. In case the homeowner is deep in debt, they may still have to sell their house and quit their dream home.
Buying a house takes away from the money you could be saving for retirement:
Buying a house and paying the mortgage and maintenance costs take away from your disposable income. You’ll likely have less to spend on things like vacations, eating out, entertainment, etc. All of this spending could add up to you being much poorer than if you would have rented. As many people get older, they see that they have little to show for all their years of working and then discover that they don’t really own much, or what they do own is more than paid off.
You may have saved up a hefty down payment for your home, but to afford the high mortgage payments and real estate taxes each month, it will take years before you can even put aside money for retirement.
You’re tied down to one location
When you rent an apartment or buy a house, it’s important that the residence has enough room for everyone who lives there. This is especially true if your family grows and your kids bring home a few friends from school once in a while.
But even if you want to stay put, there may come a time when you need to move because of an unforeseen job opportunity, illness, or family emergency. Although relocating is hard enough under normal circumstances, it can be even more difficult if your living situation is tied down to a single location.
When you rent an apartment, your property owner will likely give you at least 30 days before the lease ends to ensure that you find another place to live.
Houses are hard to sell in this market
Houses are hard to sell in the current situation of the real estate market. In addition, many people have been foreclosed on and can’t get a loan for a house. This means that the US housing market is going nowhere fast.
It’s a little too expensive for many people, and not enough houses are being sold. This has caused the housing market to go into a slump. Many large companies have been negatively affected by this as well. In fact, it is one of the reasons that layoffs have been so widespread recently.
In addition, there are fewer jobs available in the housing market. This means that there will be less chance of promotion, and it might even mean a pay cut if you are lucky enough to keep your job.
Houses are not selling fast enough in this economy, which is why people may not have enough resale value. It will bring you a huge opportunity cost for wealth building.
Therefore, you should not buy a house if you can avoid doing so. If you own one already, you should not sell it, and it is better to wait for a stable economy to get a fair value.
If your home value goes down, you’re stuck with the mortgage until it recovers
When the value of your house falls below the mortgage, you get stuck making payments on a property that’s worth less than what you owe. That’s why people lose homes to foreclosure. You are stuck with the debt unless you can sell the house for enough money to pay off the mortgage loan.
If you’re considering buying a home, make sure that your lifetime monthly housing costs – the cost of mortgage payments, plus property taxes and insurance premiums – would not exceed 30% of your income. The old rule was 25%, but many experts now think that level puts homeownership out of reach for too many people with a steady income.
Even in the best case, when your property increases in value and you sell it at a profit, you’ll probably end up paying capital gains tax on your profits; if you’re not in a high tax bracket and the gain is small, this might mean you’ll owe more in taxes than you make from the sale price.
In reality, that means homeownership is a bad investment for retirees living on a fixed income. Mortgage lenders typically require you to have enough salary or savings to pay your housing costs plus all other household expenses and still save at least 10 percent of your gross (pre-tax) income every month.
If you use retirement accounts to buy a house, you’ll eventually have to pay taxes on the withdrawals you make to fund the purchase.
If you’re in a position where you can afford it and can handle some risk, going into debt to buy a home might work out better than renting over the long term. But there’s no rush: Home prices today are lower than they were five years ago, and you’ll probably get a tax break for buying your first home.
Conclusion
Buying a house is a waste of money; It is so expensive, and you’ll be stuck with the mortgage until it recovers. Renting allows you to save for the future and gives you more flexibility in your finances.
You can’t control your mortgage payments, property taxes, and insurance every year or repairs and renovations required on a home that makes owning an investment risky.
Houses are hard to sell right now, so if your value goes down, there’s no guarantee how long it will take before selling again. The risks of buying a house far outweigh the benefits when renting offers so many advantages.
