I think a majority of people would say it is better to buy simply because of the “I own it”, way of thinking. I used to believe the same thing. I think people do not take into consideration all of the things that should change that “normal” way of thinking.
Dave Ramsey believes that if you are in debt, have no savings and no plan you SHOULD NOT buy, and I am right there beside him in agreement. You need to consider insurance costs, property taxes, as well as being responsible for ALL repairs. All of which does not enter into the equation when you are renting. You absolutely have to factor in the risk that comes with buying when you aren’t ready.
Also, I believe that anyone wanting to buy a house and doesn’t feel they should wait for the 100% down plan to kick in, MUST be able to qualify for a traditional 15 year mortgage. Otherwise creative financing may CREATE more of a problem than a solution. Adjustable rate mortgages, balloon mortgages and interest only loans are given to people that ARE NOT ready for home ownership. Just for the record we have an “Interest Only” loan and WE HATE IT! We had a case of house fever because we “had” to have this house.
Hindsight is 20/20 by the way.
We “own” a home because of that same way of thinking, but I wish we would have waited until we were a little more prepared for the responsibilities that come with home ownership. There was one time when we had TWO houses at once. One we were renting out and of course the one we are currently living in. Murphy hung out on our back porch for sure and I am so glad we got rid of the rental. I am 100% convinced that we dodged a bullet as we signed the papers to sell the rental. Not only was it before the real estate bubble burst, but we were really eating some cost due to our tenants. We found out that people do not take good care of something they do not own. Sometimes finding another tenant was like finding an employee to cover shifts the day before the biggest day of the year. Our turnover rate was probably higher than McDonalds. My point is that we were not ready and because of it, we paid some stupid tax. We were told that it was “smart” to get another house and to rent the first one out. Luckily, we still made some money in the end after the dust cleared. Notice I said luckily!
When is the Right Time to Buy?
Before you go into debt to buy a house, you should first pay ALL (yes I said ALL), of your outstanding debt. This includes cars, boats, furniture, medical bills, student loans, and anything else that you are making payments on. Get rid of it! Use what is called the debt snowball to pay off your debt from smallest to largest. Every time you pay off something roll the money you were paying on that debt over on to the next debt. Once ALL your debt is paid off, you should then save an emergency fund with at least 3 to 6 months of expenses. Your one income, if lost, could put you in a world of hurt so you need to be prepared. Also if you have an irregular income, or work on straight commission you will want to be prepared for those slow months. Otherwise it is up to you and your spouse to decide which to choose. Dave Ramsey says that the spouse that wants the Fully Funded Emergency Fund the highest wins. If you want 3 but he/she wants 6, he/she wins.
Once you have no debt and have saved 3/6 months of expenses you are ready to start saving for that down payment. No, 0% down mortgages, and forget about the 30 year mortgages all together. A 15 year mortgage will not be much more per month than a 30 year and you will save a ton of money from avoiding the extra interest. Dave likes to point out that a 15 year mortgage ALWAYS pays off in 15 years. Before you head off to the Mortgage Company though, I would like to offer another solution. This solution will make you learn a lot about patience but it will also give you the most Financial Peace. I would like for you to consider the 100% down plan.
100% Down? Are You Crazy?
Nope, hear me out. If you are on a Total Money Makeover and you have saved your FFEF, which is Baby Step 3, then you are ready to knock out two more baby steps before you start saving for that home. Baby Step 4 is to save 15% of your pre-tax yearly income for your retirement. Then if you have kids, or plan to, you can start investing $2,000 a year into an Educational savings Account (ESA), which is Baby step 5. With no payments to speak of, a solid Emergency Fund, 15% towards retirement and approximately $166 a month being put away for college expenses, you are in a fantastic position to become gazelle intense and save for that house you’ve been wanting. If you are intense enough, in two to three years you could be in a position to buy a very nice, paid for home, with no payments EVER. EEEEEEVERR!!!
You have NO PAYMENTS and 3/6 months of savings. Your income is FINALLY yours to build wealth so that you can experience true Financial Peace. The average person doing a Total Money Makeover reaches Baby Step 7 (Build Wealth) in an average of 7 years. That is not bad when you consider that most people have a mortgage, car payments and any other thing they can finance for their entire lives. So seven years of sacrifice and hard work doesn’t seem so bad, does it? Giving up the bondage of slavery for Financial Peace and freedom is very appealing to me. I sure wish we weren’t slaves to our lender!! Now we have a plan and we will remove the bondage as fast as we can.
Extra note: The argument I hear the most about why you should have a mortgage is because of the tax benefits. A tax deduction is NOT a good reason to buy a house. To avoid paying Washington in order to claim the interest as a deduction and give the bank significantly more of your money is not good math.
Plan, Save, THEN spend!