Owning a home is what’s called the American dream; however; if you’re not careful, the American dream can turn into an American nightmare. Today most homeowners have a mortgage payment, meaning technically they don’t own their homes, the bank does.
According to the 2013 American Community Survey, only 20% of roughly 132.8 million housing units are owner-occupied with no mortgages. In other words, that’s a lot of homeowners who own mortgages. But is that a problem? It can be if you’re not careful when it comes to purchasing your home. There are a few factors you should look into before diving into what’s probably going to be the most significant purchase of your life.
The first thing to take note is that owning a mortgage is costly. If you get a 30 year fixed rate with a 3.5-5% interest, you’re looking at paying nearly two times the principal amount of the mortgage. Anything over 5.5% interest and you’re looking at paying double the principal amount in 30 years, effectively buying two homes in 30 years.
That’s a lot of money going into interest payments, cash that could go elsewhere. But hey we all have to live somewhere. No matter what you’re going to be paying interest on your home or the landlords, so why not spend it on something you could or will eventually own right?
While this argument is valid, there are reasons why owning a mortgage may not be a good idea.
A Home Mortgage Can Limit Down Your Job Prospects
After you settled into your home and worked at your job for several years, you decide you want to promote to a better job. Unfortunately, you realize that the position(s) you’re looking for is a distance away, and the best thing to do is to sell your house.
However, it’s not easy to relocate after settling into a home for a few years. Chances are you’ll have a lot of furnishings and other assets tied to your house or perhaps it may not be a good time to sell. Whichever the case, the issue you have is that you prefer to relocate and live closer to your new job.
What do you do? You can try renting your home if your lender allows you to. Although, being a landlord may not before you, a lot of time and work required into managing a rental property.
The best time to own a house is when you’re near the peak of your job growth. That way you know you’re going to live in your home for more than just a few years but perhaps a decade or more. Furthermore, you could work for a company that provides a lot of potential job growth. If so, getting a mortgage sooner rather than later is a good idea if you’re financially ready for it.
Government is Heavily Involved
The government heavily influences the housing market. You have to understand what’s going on with monetary policy. Since 2001 we’ve seen a financial system of low-interest rates issued by the Federal Reserve. As a result, low rates encourage borrowing and home buying.
From 2003 through 2006 we’ve seen a massive spike in home prices in such a short amount of time. In fact, in the year 2000, home prices were about four times the median household income. In 2018, home prices were five times the median household income.
A significant increase, even during a time of the great recession. But because of the Feds low-interest-rate policy, the housing market was quickly able to recover.
The Fed’s Low Rates Influences the Housing Market
In a real market economy where the Fed does not manipulate rates, home prices would not soar an additional 100% in 10 years. So the question becomes, what happens when the government can no longer manage the housing market?
Due to our national debt, the government will have to face the fact that it can no longer subsidize the housing market. The government is going to have to raise rates to keep our U.S. Dollar stable. Once they’re forced to do this, home values will plummet.
However, the difference this time is the government won’t have the means to bail out the banks, the economy, or homeowners. Sure they can try, and I am sure they will, however; if they try to do so it will be at the expense of our Dollar, which will lead to a currency collapse. But I won’t go into full details on that issue here.
Understand That a Home Mortgage is Not for You.
A mortgage is for the banks; banks created it to generate additional revenue. Think about it; it’s a win-win for them. If you accept a mortgage, they receive interest payments from you that may total up to two times the amount of the principal loan or more. But surely they’re taking a risk?
There’s risk involved if home borrowers fail to pay back the loan, but at the same time, they can take repo the house and re-sale back to into the market. The real risk for a bank is when there’s an entire housing market collapse similar to 2008. But then again if the government comes to their rescue, there’s not much risk involved at all.
But I want you to think about this next question I am about to ask you. Out of all the homeowners you know, how many of them paid off their mortgage?
Not Many Own Their Homes
I bet the answer is not very many, remember only 20% of housing units are owner-occupied with no mortgages. Most people never pay off their homes; in fact, many people upgrade from their existing home to a bigger one or take out equity from their homes. Just think about all that money you’re paying towards interest and never having a home to own but rather something to borrow against getting more and more into debt.
Also, let’s not forget even if you paid off your mortgage you’re still not the owner of your home due to property taxes. If you fail to pay property taxes, the government will confiscate your house. Many local governments are struggling to pay off their debts, and it’s not unlikely for them to raise property taxes.
There are local governments who can and will raise property taxes if they wish. Be sure to consider this and be sure to stay far away from Cook County.
How Should You Approach a Home Mortgage?
Understand this deal isn’t great for you. The best way to purchase a home is to buy it outright if you can, to avoid paying the insane amount of interest. However; 95% of Americans are not able to purchase a home with cash and have no choice but to apply for a mortgage.
First off try to delay your home buying until you’re further in your career, preferably towards the middle-end of your job. When you’re in the middle of your career, you should be settling down within the area you plan to reside. As I said earlier, relocating to another job while tied to a home that’s not in the area of your job location can be an emotional drain.
I know renting it’s not the best option, but renting should only be temporary. By the time you’re around 26 or 28 (assuming you skipped college) you should be entering the middle-high end of your career making pretty good money for yourself. Focus on boosting your income and keeping debts to a minimum before purchasing a home. Live with a roommate to reduce living expenses if you have too. Life will go a lot smoother if you do this not to mention you’ll have more options as well.
If you decide to get a mortgage, be sure to get a 15-year and not a 30-year mortgage. Remember you want to pay less interest to the bank. The faster you can get out of that mortgage and own the home, the better. There’s nothing worse than paying interest on a debt you owe, best to pay those off quickly even if the debt is an asset that can build equity — also if your home’s equity rising, understanding your house isn’t making you money because it’s not sending you checks.
The government has set the stock market and housing market as a barometer of how well the economy is doing. It’s in the government’s best interest to make sure that these two markets are doing well, regardless of what the other statistical data say. Why is this important? Sort of a buyer beware, there’s nothing worse than to buy your home at the peak of a bubble only to see the value of it collapse in just a few years.