Mortgage rates are low. The housing market is flooded with distressed sales. Is it time to buy your first house, before rates and prices go up again and it’s too late?
That’s the wrong question, according to the new book, Rent vs. Own (Chronicle). The right questions include: Can I afford to buy? How will a house and a mortgage really affect my financial situation? Do I really qualify for those low advertised mortgage rates?
In the book, author Jane Hodges takes a truly balanced look at an emotional subject, and offers plenty of tips to keep you above water–in terms of your money and your sanity–whether you choose to own or rent. Hodges spoke* with MintLife’s Matthew Amster-Burton (who–disclosure alert!–appears briefly in the book). An expanded audio version of this Q&A is also available.
Why Rent vs. Own is different than other books.
MintLife: What makes Rent vs Own different from other books about homeownership?
Hodges: What I wanted to do in this book is talk about what home ownership is like for an audience that isn’t actively sold on the concept of owning. What happens when people decide to buy is: they go to books that give them the tools to get a mortgage and tell them a little about what home ownership is like. But most of the focus is on qualifying them to make the purchase. And I wanted to write a book that not only address some of the brush strokes of that process, in case you do get interested, but also talks about what will it really do to your financial and personal life to own. I’m not against owning—I just think that the rhetoric around owning leaves out a lot of really important information that you don’t find out about until it’s too late.
Does homeownership equal security?
MintLife: You spend a lot of time in the book busting myths about both renting and owning. Give me one of the biggest.
Hodges: That your life will become more secure if you’re an owner. To really make the most out of owning you need to stay a long time; you need to have steady income so that making the monthly payment isn’t stressful; and you need to have a sense of how to preserve your property and maintain and take care of it. But if you think about how people really live, most households are two-income couples; people are giggers, they move around or they have collections of income streams; people need to move for their work; and their income can go way up and down.
MintLife: Oh, you’re talking about my life, Jane.
Hodges: Right, my life too.
Are mortgage payments an investment?
MintLife: I’m a renter. Let’s say I’m thinking about buying. Is this automatically going to be a financial win for me? Right now my entire rent payment is gone forever–it goes to my landlord, to furnish his yacht or whatever. Whereas if I buy, then some of my monthly payment is going into equity in my home. Anything wrong with this argument?
Hodges: One of the things that’s wrong with that argument is that there’s an assumption that if you’re renting, you’re losing out on a form of investment that owners have. While it’s true that when you make a mortgage payment you’re accumulating some equity in your home, if you don’t stay very long, your initial payments, the first several years, mostly go to interest, so you’re not actually building that much equity. The second issue is that if you don’t have a large down payment, don’t have a lot of equity and you don’t stay very long, the so-called investment in your home isn’t really going to give you that much of a pay off. And the majority of first time buyers only stay in their first place for four years.
Also, four out of five first time buyers don’t make the stereotypical big, twenty percent down payment. A lot of first time buyers make a low down payment and they leave quickly. They pay fees to get into the home and fees to exit the home, so whatever equity they did get to play with is completely erased by the fees of acquisition and purchase.
The downsides of homeownership.
MintLife: So much of your book is about something that I’ve never really seen discussed in such detail before: protecting yourself from the downsides of owning a home. Compared to renting, the financial upside of owning financially can be huge, but the downside can also be huge. It’s a classic risk-reward tradeoff. So if I do decide to buy, what are some steps that I can take to protect myself financially?
Hodges: If you’re not making a large down payment, you would want to make sure you’re planning to stay a while. Ask yourself if you’re willing to get creative to bolster your income, whether that means working a little extra, renting out a room, doing some Airbnb in your spare room. Just ask yourself: do I have savings? am I prepared for expenses? The typical cost annually to maintain your home is between one and four percent of its purchase price.
MintLife: That’s a lot.
Hodges: Yeah, it’s a lot. If you buy a $300,000 home, do you have three to twelve grand sitting around just for home expenses? There’s always going to be that year where you need a new roof, which is ten grand, or you’re going to have a big problem with your sewer. If you don’t have the money sitting around, you need to keep your credit clean so that you can finance that work.
It’s sort of like running a business. You need to keep your credit good, you need to have access to cash, whether you’ve saved it or you have some credit cards that you don’t run a balance on. You need to have good credit in case you want to go to Home Depot and do the twelve months no finance thing.
The upsides of homeownership.
MintLife: We’ve been pretty tough on homeownership so far, and the book really isn’t pro-rent, anti-own. Let’s say something nice about home ownership. You have been a renter and a home owner, right?
MintLife: Well, I’m the guy who wrote the renter’s manifesto. I am clearly biased, so tell me something I’m missing out on by never having been a homeowner.
Hodges: There is something kind of fun about owning a home. You have responsibilities, like managing your money in a certain way to pay for fixes, but you also have creativity. You know, “We’re gonna save up and turn this room or this patio into the vision that we had.”
Hodges: It is fun to host people, and say, “This is my home, and this is what I’ve done to it. And this is why we chose to live here.” There’s really nothing wrong with that. And, you know, home owners actually, also kind of bond. You go through stages of life, where, you know, people start buying homes or people start getting married, or they start having kids. And, you suddenly, enter this, this sort of, club of people who’ve done the same thing. And it’s interesting to see how people who’ve done the same thing operate.
In my neighborhood, there’s a baby sitting co-op. It’s not that you have to be an owner to do this, but if you, are gonna raise kids, sometimes you pick a neighborhood and you stay there because of the school district. They have this system of credits, where you take turns babysitting. And all the kids and parents know each other, so all the kids are at so-and-so’s house tonight. So there’s lots of good things to it.
Measuring your local housing market.
MintLife: For people who are weighing this decision, you hear a lot about looking at measures of your local housing market. Because the financial tradeoff between owning and renting varies hugely from market to market. I mean, Las Vegas is not the same as New York City. What measure should people be looking at to help figure out not just, “Does home ownership make sense for me?” but, “Does it make sense for me in this place where I want to live?”
Hodges: There’s a couple questions that they should ask themselves. Am I just looking at owning because the price-to-rent ratio is changing, or rents are going up? Or is it, “I truly want to own. I plan to stay somewhere 5 to 10 years”? Inventory’s another issue. There are some markets where you want a home of a certain size and you just can’t rent it affordably. Do you truly want to own a home, or are you just looking at math and social pressure?
But if you truly want to own a home, other things that you would need to look at that are not really in the mortgage workup—some of the true costs of ownership—factor in for maintenance, factor in for higher utilities. Look at what all of that is going to cost you, look at whether you have to commute.
Look at all those factors, and then ask yourself, if, once you move in, you could still save for retirement, you have a little bit of a cushion, or whether you’re really throwing everything into owning.
In terms of local metrics, if you’re looking for your justification to own, there’s always rhetoric from the real estate community on both ends, like, “We’re nearing the bottom; get in before prices go up again.” If prices are high, it’s like, “Buy now because they’re going to go higher.” So there’s always some story that’s going to get told about why you should buy.
Where to start.
MintLife: If I’m planning to buy, should I start by consulting a real estate agent?
Hodges: If I were looking to buy a home, my first stop would not be a Realtor, it would be a mortgage broker. You can always buy a home. However, if you don’t have the perfect set of criteria, you’re going to have layers and layers and layers of fees and higher expenses, which will cut in to how much you can borrow. So if you really want to buy and you have low credit and you get a bad interest rate because of that, you have to ask yourself, “Would I rather spend six months cleaning up my credit and getting a better interest rate?” I would make the decision around that.
A lot of people start with tire-kicking with Realtors, going to open houses. That’s okay, but what can happen when you’re led by aesthetics is that you’ll finance by any means possible.
MintLife: Right, you’ll fall in love.
Hodges: Whereas if you’re led by rationality and, “Here’s my budget, and I’m going to shop within it,” you’re like, “No, no, I can’t go over this because it’s going to get really expensive and it’s going to be a bad deal.”
I think people need to know what expenses are kind of hidden in the closet, and they’re going to open up that closet after they sign on the line. And it’s going to change their life a bit.
*This interview has been condensed and edited.
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.