My best friend is struggling with the issue of buying a home if it means a mountain of debt.
She writes: “I’m a Dave Ramsey “avoid debt at all costs” kind of girl, so most of this stuff that Sheets [buying a home with creative financing] teaches is abhorrent to me. The Sheets’ student testimonials all focus in the “increase in their net worth”, but creating such a mountain of debt as he suggests seems to me like it might be the very kind of system that Dave Ramsey had used before his personal financial meltdown that led him to teach what he does today.
Trying to save enough money for a down payment for a first home or to get started in RE investing to have decent equity in today’s environment where incomes are stagnant but the price of housing is rising creates a situation of despair as the hope of getting there keeps moving just out of reach.
Somewhere between these two surely some sort of sane solution must exist?”
I understand this torment. When I was in my early 20’s I was buried underneath a mountain of debt from a student loan and the education I had obtained was hardly paying dividends for me. The housing crisis was only 5 years ago and the painful memories of over extension of debt are still very close in the memory bank. So what’s a girl to do?
- Address your housing needs. You have to live somewhere and since renting a home provides for nothing in return short of a place to store your material possessions and rest your head, I advise everyone to avoid renting if at all possible.
- Avoid using your primary home as a piggy bank and pay your home off as quickly as possible.
- Don’t think of your primary home as an investment. I know that sounds strange, but unlike stocks or bonds, selling a primary home because of market conditions is a very unlikely proposition because you will still need a home to live in. That being said, do buy a home with good resale attributes in case you must sell in a buyers market. Click here to read my Red Flag Checklist when buying real estate.
- Look for no and low down payment mortgages such as USDA, VA or FHA home loans. Your lender should also be able to intelligent suggest local grants and first time buyer programs such as the Washington Mortgage Credit Certificate that actually puts money back into your pocket when buying a home. (most programs consider a First Time Buyer as someone who hasn’t owned a home in the last three years, so even if you bought a home in the past, you still may be eligible.)
Let’s break these points down even further.
Throwing Your Money Away by Renting
We will keep the numbers simple and just assume rent at $1000 per month. Over the course of a year that’s $12,000 and for a five-year period that’s $60,000. When the housing market crashed and home owners lost this much money we called it a crisis, yet millions of Americans are throwing money away on rent every year.
I’m sure the devil’s advocates out there would rightly point out, “Yeah, but there is interest paid on a mortgage and housing upkeep that you won’t get back either.” And those are a valid points. I could refer you to a few Buy vs. Rent calculators, we could talk about the tax benefits to mortgages or I could talk about the ability to lock in a historically low-interest rate and how that protects you from inflation. Instead, I’d like to move to point #2:
Pay Your Home Off as Quickly as Possible
The magical thing about time is that it leverages a seemingly small action to produce powerful results. The financial reward in home ownership takes years to manifest itself, but it does come. The young home buyer that diligently makes their payments and avoids refinancing and adding debt finds their cost of living being reduced in two ways. As inflation and the cost of mortgages and rents rises, the established home owner is immune to these cost of living increases. Over time, as the mortgage is completely paid off, the home buyer can enjoy living without a mortgage payment. These benefits are never realized by renters and only slowly realized for those who frequently re-finance their home.
Why Isn’t My Home an Investment?
Successful investing in anything, whether it be stocks, bonds, real estate or even gold coins, takes a lot of knowledge, time and freedom to move assets around. It takes knowing how long to leave your money in the investment, it takes understanding tax benefits, as well as when to cash it out and for how much. It also involves risk, you don’t want to live in a risky investment. We’ll talk about Real Estate as an investment another day, I’m just recommending you don’t put your home in the investment box. Instead think of your housing as a necessary expense that could be eliminated over time by buying instead of renting.
While your home may appreciate and also give you an impressive return on your cash investment, it cannot be sold simply because the market is hot and it cannot easily be liquidated once the market sours. To put this in perspective, I have asked 100’s of home owners who were lucky enough to sell (without simultaneously buying another home) at the peak of the real estate boom of 2006, only one person even hinted at selling because they thought the timing was right. For most, a home is sold because of the unpredictable life events that happen to us all; marriage, divorce, a new baby, a death, a job loss, a job gain, etc. If you had to buy and sell your mutual funds under these circumstances, you’d never call it an investment.
Here’s my advice to anyone who needs a place to live. Avoid renting if at all possible. Buy a home you can modestly afford and one that you can live in for as long as possible. Put more weight on how the home fits your life-style versus how much it may or may not appreciate but DO avoid features that are difficult to sell. Run amortization schedules to determine how much equity you would gain even if the home sees little appreciation. If possible, make a plan to own a home outright before you reach the age of retirement. Never take cash out or add debt to the mortgage by refinancing the home, especially if it means an increase in the interest rate you pay.
Buying a Home with Zero or Little Down Payment?
The bleakest point in the future of the housing market is the quickly disappearing low down payment mortgages. See the Wall Street Journals article on Mortgages getting pricier. After the mortgage crisis, policy markers are rapidly moving to reduce low down-payment mortgages from the pools of mortgage-backed securities. As a person who counted on a low down payment program to even get into the housing market, I see these policy moves as an attack on the financially disadvantaged. I’m incredibly disheartened and saddened by the policy changes.
That being said, let’s talk about why policy makers are moving in this direction. Like most legislation the intent is good. A famous economist (and I forget which one) has said, “a home with negative equity is nothing more than renting with debt”. In order to restore faith in the mortgage backed security business, the loan portfolios must include better loan to value ratios (LTV). Low down payment programs are likely to become more rare and more expensive.
I recommend talking to a top rated mortgage professional who can give guidance on state bond programs, first time buyer programs and USDA zero down home loans. There are many programs out there, if anyone tells you that these programs aren’t worth looking into, find another provider.
So is Mortgage Debt Good or Bad?
The answer is both. Well managed mortgage debt is better than renting because it protects you from inflation and eventually you own the asset. Unless you can live somewhere for free, renting equates to throwing your money away.
I recognize it’s tough out there with rising prices and there is no magic solution, but if you work hard at finding the right team of real estate and mortgage professionals you can reach your housing goals. If you need a good recommendation for your local market, I can help. Click here to contact me today.