Is Buying a Home a Good Savings Vehicle?

Posted July 5th, 2010
by Staff (no comments)

Until recently, most anyone would tell you that it makes more sense to buy a house than rent, if you are able to afford to do so. The reasons, they would claim, are simple. Namely, when you rent, you throw your money away, and will never see it again, but when you buy, you build equity. But, when you factor in other concerns like home maintenance and repair, homeowners insurance, and taxes, is it really the best way to build a nest egg?

It Depends

The answer varies, depending on a number of circumstances, including your location, your credit (and the resulting interest rate), and market factors over which you have no control and likely can’t predict with any degree of accuracy. Ultimately, if you really want to know what makes sense for your situation, you need to do a little homework.

Understand the Interest

With most mortgage loans, the overwhelming majority of what you will be paying for the first 10 years is interest. Interest paid is money thrown away that you will never see again, every bit as much as rent is. For the first 5 years, an average of 80% of what a homeowner pays covers interest. Years 6-10 still see the homeowner divesting 70% of his payment into interest. Unless your housing costs are actually lower than what you were paying to rent, you probably would do much better investing your money into something else.

What Constitutes Housing Costs

When determining your housing costs, it’s important to keep in mind that your mortgage or rent is just the beginning of it. If you’re a homeowner, you also need to factor in homeowners insurance. You also need to consider the costs of upkeep. Small things like gas for the lawn mower stack with larger tag issues like fixing plumbing or wiring, repainting every 8 years or so, and replacing the roof every 20 years. By the time many homeowners have any significant equity, they find that they need to borrow against it to maintain the house, keeping them in a cycle of debt.

If You’re Going to Buy

There are at least one very good reason to buy a house, in any market. To live in it. If you are going to be in the same house for the duration of a 30 year mortgage, then you can certainly make a case that it is a worthwhile investment. You will get back a good part of what you put in (though by no means all, in most cases), and you will have had the benefit of living there. Today, however, homeowners average barely 7 years in a home before trading it in for another house and another mortgage. And if you do that, in most cases, you throw away considerably more money than if you had just rented.

Photo via alancleaver_2000

Categories: Advice, Home Value

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