Don’t Buy A House Just To Buy A House

Recently, I was speaking with a real estate agent, because I was curious about a very well-developed community in Orange Park, Florida. This community had it all. It had swimming pools, golf courses, tennis courts, swimming slides, an elementary school, and a nature park off of the St. Johns river. She immediately went on her sales pitch about the community and asked if I was ready to buy. I told her that my wife and I were waiting until she was done with school, and we wanted to live in Jacksonville for a year before buying a home.

She then proceeded to tell me about her 19 year old son who bought a $200k house on a 40 year mortgage. It was clear to me that her son was the victim of having a mom who was in the real estate business and brainwashed him into thinking that buying a house is ALWAYS the best thing to do. What’s your opinion? Do you think a single 19 year old should be a homeowner with a 40 year mortgage?

My question is, did he take a look at the amortization schedule for a 40 year mortgage? My guess is that he won’t start paying anything significant on the principle until 15 years into the mortgage. Maybe he’s banking on appreciation in a housing market that is dull and won’t start going up for another couple of years. What other incentive is there to buy just to buy? Does a 19 year old need all of that space? Does he need the hassle of maintaining a home like that? Some of you might be saying, “Are you nuts? Homeownership is a great thing! He’s showing a lot of responsibility for owning a home that young!”. I’m not saying he’s done a horrible thing, but what I am saying is, what’s the point? He can throw away his money to a renter or to interest. Sure, he’ll probably get his money back when he sells, but he’s 19 years old. What if he wants to move quickly and no one will buy the house? What if he can’t afford the payment anymore and he needs to sell?

My point is that homeownership CAN be a burden if you don’t do it right. Here are some tips for buying a home the conservative way:

  • Save up a big down payment of at least 20 percent.
  • Buy a home on a fixed-rate 15 or 20 year mortgage.
  • Don’t allow your payment to exceed 30% of your annual income.
  • Save up a large emergency fund to take care of unexpected maintenance problems

The next 18 months will be a great time to buy a house. Prices will continue to fall, and sellers will become more desperate to sell. You’ll be able to get your closing costs paid, a home warranty thrown in, and maybe even some furniture! However, don’t buy into the homeownership fever. Don’t let a salesperson, family member, or friend pressure you into buy a home before you are ready. If you want to buy a house in the next few years, my suggestion is to put together a systematic plan that with the goals listed above. If you follow those, your home buying experience will be extremely enjoyable and less stressful.

  • Glenn Patti

    I’m sorry to disagree with you on almost every point. Your whole argument is is built upon the premise of the 19 year old never moving. I think the logical assumption is that he would move, and then why would he want to pay down the principal at all? Equity in a house is a non-performing asset, he would be better off taking the money he would be putting into prinicipal and stuffing into an investment account. As for the question that he may “need” to sell quickly, it has nothing to do with the mortgage, but whether he should have bought it to begin with, which in your article is improperly co-mingled with the financing. Your conservative measures are also arbitrary and some just plain wrong. The 20% down payment is not conservative, it is collateral for the bank and does not benefit the home buyer at all. There is no reason for many people to have a down payment, unless they plan to live in that house for the rest of their lives. Why the short term mortage? As in financial planning, one size does not fit all. A mortage should fit within a comprehensive financial plan with cash flow needs. I agree with 30% of annual income, although 28% is the accepted norm, and this is extremely important. I also agree with having an emergency fund.

  • shifuimam

    I just wish that more people had your kind of logic. The average American’s attitude toward money and debt in general is really quite frustrating sometimes.

    Then again, when I’m armed and ready with my 20% down payment (which is only going to be about a year from now), the housing market will still be in such a downturn that I’ll be able to take advantage of it and get a great place on the cheap. :)

  • Marc Beharry

    I wish more people had been informed of these things and about the possible risks before investing their hard-earned money.

    It is highly saddening that over one million people have lost their homes to foreclosure already and millions more are projected to suffer the same fate.

    I fully agree with Jim Cramer, from CNBC. His tirade on the matter was excellent!

  • Casey

    I really like this post. It is completely true, and it is the truth that a lot of people need to hear (myself included). It is hard not to be caught up in the housing fever right now. I am really sad to hear about that 19 year old. I feel he is going to regret that, but I understand why he did it if he was being pressured by a family member.

  • Sean Richardson

    I disagree with you. I bought my first house at 20 years old. The difference is I bought a 50k home. I don’t live in California, or Florida, or anywhere else that has the very high priced real estate.

    I also disagree on the 15 year mortgage. All my homes are 30 year mortgages. Nothing says you have to pay the mortgage for 30 years. You can pay it off in 15 if you like.

    I’m 26 now and own 4 homes, one of which I just bought in the last month. 3 of the 4 are rented. I’ll give you that I have a shit load of responsibility, but I think the money is much better spent then on a degree that won’t carry one very far. (liberal arts, etc)

    The last two homes I have bought with very little money down. The current home I am living in I brought $0 to closing. I bought a river front home for $108,000. My payment is near $900 a month, which is half my income.

    Now of course I am taking a risk and I wouldn’t recommend this for the general public, but I am able to work on my own electrical, plumbing, repairs, etc. When things break I fix them. If they are over my head I get a contractor, but most often I do the work myself. This applies to my car also.

    Buying a home, with a low down payment, assuming one isn’t paying to much for the home and that they can afford it, is a good idea for anyone of any age.

    What is a bad idea is borrowing on the equity of the home. Ever. Or mortgaging the equity in your home to purchase another investment, unless you have no other choice.

    I think in a lot of cases you have an overly conservative point of view. One can own a home at 19 years old and if the need arises to move, rent the home. Or sell on a land contract. Or “rent to own.”

    I still read your site, even though we don’t always agree. You do have some very good ideas.

  • Dan Rocha

    Wrong, wrong, wrong. If you have extra money you should be investing it in something with decent (> 5%) returns. If you’re doing that, it makes no sense to sink too much of your cash into something that’s going to appreciate at a slower rate. Your best bet is an 80-10-10 loan (only put 10%), and the longest possible mortgage that has a reasonable interest rate. You can always pay more to bring down the principle, but you will also have the flexibility to pay a minimal payment.

  • author

    I should have started off this post with a few basic assumptions. I agree with those of you that paying off your house does not need to be your first priority in life. However, the real estate market IS a performing asset. It appreciates much better than 5% a year over a long period of time.

    I was assuming that the young person is debt free and is already investing for retirement. I would tell someone to clean up some of their smaller debts first or to start an IRA before I told them to save up a big down payment or start paying more on the principal of their mortgage.

    I totally disagree that having a down payment is pointless. First of all, having a 20% down payment will eliminate having to pay private mortgage insurance, eliminates paying a crappy interest rate on a second mortgage, and it gives you more piece of mind. If for some reason, you buy a house and you need to sell it like a year or two later, the housing market may have gone down during that time, and now you can only get $90k instead of $100k, which is what you paid for it. If you had a 20% down payment, you’d just cut your losses and move on. But without a down payment, you’ve got to get an unsecured loan from a bank to cover the difference.

    Many of you are thinking only with your heads. I think you should think with your brain and your heart when it comes to personal finance. You need to think about reducing the risk in your life. Real estate is not something to play with or find creative ways to make it work. It’s one of the few decisions in life that can greatly hurt your financial health.

  • Josie

    Shame for the 40 year mortgage… When I was researching mortgages, Imet one who had a ten year interest only. With values on a slight downturn, He’s got to be regretting that move.
    As for me, I am happy Igot into the market when I did, with grants and little moeny down. But I had to sit tight to realize appreciation… It is a huge commitment to maintain a propoerty when travelling and hobbies are really how Id rather spend my time. Add the transaction costs in, and it really isnt a one size fits all proposition that home ownership is the right solution for everyone.

  • Lora

    I am 19 years old and My husband and I just recently bought a new home. I have a child of my own and I didn’t see anything wrong with buying a house. It was at the right time I dont think you should judge someone because he had a house before you did. it’s becoming more common these days to have a house at such a young age. My house will be paid off in half the time yours will because I started early. People do have money to buy houses it doesn’t matter what age!