Why Buying a House Might Not Be Such a Good Idea After All

I know, I know.  I'm a heretic.  How could I possibly be so misled/crazy/plain stupid as to suggest that buying a house might not always be a good idea?  Isn't buying a house the American Dream and the Holy Grail of financial security?

Please don't stop reading.  I'm not going to say you should never buy a house, just that it shouldn't be an unconsidered, default goal for your life.

Let me see if I can explain my position.  Then you decide if it makes any sense.

How you might lose more money owning instead of renting

I know that most people believe that renting is throwing money away.  But that's not always true. 

Back in 1988, my husband Jon and I believed that "responsible adults" who planned to have children were pretty much obligated to buy a house as soon as possible.  So we bought a basic tract home for $76,000.  In 1996 we sold that house for $115,000 (just over 50% more than we paid for it).  It looks like we "made" $39,000 on the deal, doesn't it?

But the reality is not so straightforward.  After paying sales costs and subtracting the amount we'd spent on home improvements over the years (which we'd mostly financed with a home equity loan), our real profit was just about the same amount we'd used for a down payment in the first place.

In other words, it was as if we took that down payment and buried it in the ground for eight years.  We didn't even earn any interest on it.

Now, that's pretty bad.  But it gets worse, because I hadn't yet factored in all the costs of owning.  How about property taxes?  At just over 1% per year, we paid another $6,500 or so to own.

Of course, we also paid for homeowner's insurance (at least twice as expensive as renter's insurance).  And then there's the biggie – mortgage interest.  Don't forget that you only get an additional tax break if your total itemized deductions are greater than the standard deduction, which you get to take even if you don't pay mortgage interest.  And you only save a small percentage of whatever that larger amount is.  The reality is that we paid thousands of dollars in interest every year in order to save a few hundred dollars on our tax bill.

Remember that none of those costs contribute even a penny to equity.  Just like rent, the money spent on closing and sales costs, maintenance and improvements, property taxes, insurance, and mortgage interest is "thrown away."  It's gone.

Looks like we actually lost money on that house.

Related article:  Why You Should Rethink the American Dream

What is home equity?

Home equity is simply your house's market value minus any loans against it.  It's how much of your house you actually own (rather than what the bank owns).

Here's an example:

• You find the home of your dreams for a purchase price of $300,000.
• You put 20% cash down; that is, $60,000.
• Your immediate equity is $60,000.  You own $60,000 of the house, and you owe the bank $240,000 for the rest of it.

Simple, right?  You start making payments, and a portion of each payment (at first, a very small portion) goes toward the "principle" of the loan (the $240,000 you owe).  That's called "building equity."  The remainder of the payment (a very large portion of it) is interest on the loan.

Fast forward 15, 20, or 30 years (whatever the term of your loan).  Because you've been steadily contributing toward the principle each month, the bank has received enough "equity payments" to recoup the initial $240,000 they gave you as a loan.  Now the house is yours to keep, and for their trouble, the bank keeps all the interest you paid as their profit.

Here's the part to remember:  The equity isn't a free gift.  It's a real cost, and you've been paying it for all those years.  So if you sell the house for $450,000 (50% more than the original purchase price), your profit isn't $450,000.  Maybe you think your profit is $450,000 less the $300,000 in equity – equity you paid for with your down payment and then every month for the life of the loan.  However, that's not your profit either.  You also paid tens of thousands of dollars in interest.  You paid tens of thousands of dollars in property taxes, insurance, and Realtor's fees.  You paid a bundle in maintenance and improvements.  You may have saved a few hundred dollars in taxes every year, but that's a drop in the bucket compared to what you've paid.

Once you subtract all of those costs, you may have no profit to speak of.  You might have even lost money on the deal.

If you keep the house after paying it off, you don't have to make those equity and interest payments any more.  But you do have to pay taxes, insurance, and maintenance – and maintenance costs are going to continue to increase as your house ages.  You will never live there for free, contrary to what some people will tell you.

If you live in the house until you die, and your children sell it, the proceeds may feel very much like profit to them.  They're receiving that windfall because you paid, and kept paying, for all of those years.  It's still not money for free.

Rent vs. buy

The truth is, renters aren't idiots wasting their money, and homeowners aren't living for free in a highly valuable asset.  Reality lies somewhere in the middle, and the final answer to the "rent vs. buy" question is more complex than the Realtor, the bank, and almost everyone you know wants to admit.

Personally, I'd rather take the down payment and invest it.  Even if I'm paying as much for rent as I would for a mortgage payment, I don't wind up losing that down payment (which you can kiss goodbye once you write the check to the bank).  And I can take all of those extra costs of owning and invest them too.  Jon and I have a pretty comfortable net worth because we don't own a house.

As a renter, not only do I not have the hassle of dealing with maintenance, I also enjoy a swimming pool and sauna I don't have to clean or repair.  (There's a gym, too, but I don't use it.)  And I don't have the temptation to keep renovating my living space.  If I owned my current apartment, I'd probably want to upgrade the flooring.  I'd want new kitchen counters, a more modern bathroom sink, and I'd love a more elegant shower stall.  The list would go on (and on), as I know from experience with the three houses we've owned.

Owning your own home might be right for you if the house is perfect for your family and you plan to stay there for a long time.  (Though you never know – at some point you might want the freedom to leave that house, but you'd have to go through the process of selling it first.)  Just don't make such a huge, expensive decision because you believe the lie that owning a home is always a smart financial choice.

I'm not a financial planner or investment guru.  I grew up knowing I would have to work and pay for the things I needed.  I've been employed as a bookkeeper, and I've budgeted and run the accounts for our household, both when we were underwater on our mortgage and overburdened with credit card debt, and as we've climbed out of that situation to a life of abundance.

My book, Simple Money: Achieve Financial Peace and Abundance with Minimalism, can help you:

• discover your money beliefs and how they influence your financial decisions
• buy less and demolish debt
• make a budget that meets your needs and helps you find ways to afford your desires
• feel empowered, instead of poor, as you control your spending
• increase enjoyment and satisfaction without much money
• and more!

We work too hard to wonder where our money went.  Life is better when we use money to achieve our dreams, and Simple Money can help you on the way.

Available as an e-book, a paperback, or in hardcover on Amazon.*

* This blog is supported by readers, not ads.  If you make a purchase through my links, I may earn a small commission.