There is much conversation surrounding homeownership. And it tends to center on the “When” of buying a home. When should you keep renting? Or when should you take the plunge and purchase a house?
But often left off is the “Why” of buying a house.
First, let’s review the “When.” There are three questions I use when answering the question, “Should I buy a house?”
- Do you plan on living there for at least 5 years? Any possible financial gain from owning a home can be destroyed in an early move. Most financial benefits of homeownership come with time. So if you are planning to move within 5 years, stick to renting.
- Will your mortgage payment be less than 30% of your after-tax pay? You don’t want to be house poor. So, for example, if your after-tax pay is $6,000 per month, I recommend that your mortgage payment should not be any greater than $1,800 ($6,000 x .30).
- Do you have at least 20% for a down payment? Private mortgage insurance (PMI) is wasted money. PMI cost you between .3% and 1.5% of your original loan balance every year. Lenders charge it because you are viewed as a risky borrower. Let that thought sink in.
If you can answer “yes” to all three questions, you may be ready for homeownership.
So that is the “When.” But what about the “Why?” There are a few good reasons why you would buy a house, but the one that is most important often gets left out.
What is it?
To be free from a house payment. Homeownership is a long-term strategy to free up future cash flow.
This is one of the most significant benefits to buying a home. Putting yourself in a position to be free of a house payment one day.
We forget this all the time. Sometimes we don’t focus on this benefit because it seems too far away and out of reach. And, sometimes, we act as if a mortgage payment is just an assumed part of life. As if it is something that will be with us until we die. You always have a mortgage, right? And, unfortunately, this mentality creates a self-fulfilling prophecy. We buy and make home financing decisions that lead us down the path of a mortgage-for-lifer.
But this is not why you should buy a home. And you do not buy a home just to build equity and to have tax benefit. Those are good things, but they are not the end game. You buy a home to one day be free from a house payment. You buy a home to one day free up your future cash flow.
Take a moment and consider this:
- What would your financial picture look like without a house payment?
- How would your future retirement look different without a house payment?
- What would your current and future generosity look like without a house payment?
Each one looks better without a monthly housing payment, right?
You should be thinking, not just about owning a home, but owning a home without debt. Realize that when you sign mortgage papers, you have not arrived. You have just started. And you should be now thinking, “How can I pay this thing off as quickly as possible?” Homeownership is a long-term strategy to free up future cash flow.
And this is the most important reason why you would buy a house.