You Shouldn’t Buy a Home If…

By Tara Struyk on 21 March 2013 (Updated 24 June 2013) 14 comments
Photo: bandita

Buying a home has often been held up as the “American dream.” Problem is, the idea that home ownership is a goal that everyone can — and should — aspire to is exactly what got a lot of homeowners in trouble during the housing U.S. mortgage meltdown. In pursuit of the dream to own a home, people threw logic (and basic math) out the window and bought into homes that were not only bigger than they needed, but also more expensive than they could afford. Of course, many lenders were only to too eager to help them get in over their heads. The rest, as they say, is history. (See also: Quiz: Am I Really Ready to Buy a Home?)

The reality is that home ownership isn’t for everyone. And even if it’s right for you, it might not be right for you right now. Whether you’re tired of renting, looking to settle down or just want to put your money toward something bigger, there are a few factors that should serve as a warning against taking the leap. You shouldn’t buy a home if …

 

You Aren’t Planning to Stay

Whether your job situation is a bit uncertain, you’re in a relationship you’re not sure will last, or you’re longing to make a move to another city in the not-too-distant future, renting is your best bet. That’s because home values tend to fluctuate a bit throughout the year and from year to year. If you are forced to move out in the near future, you may suffer a loss on the sale of your home. That’s why most experts recommend that unless you can stay put for at least five years, you’re better off renting. It’ll take at least that long to make up the costs associated with a home purchase.

You Don’t Have a Down Payment

It’s still possible to buy a home without a down payment, but that doesn’t mean it’s a good idea. The simplest reason is that forgoing a down payment costs you a lot more over the life of the loan. The more money you borrow to buy your house, the more interest you pay.

Unfortunately, that’s not the only extra you’ll be on the hook for. The other major cost you’ll have to pay is Private Mortgage Insurance (PMI), which is typically charged to borrowers who put down less than 20% of the price of the home. On a $300,000 house, PMI will cost you almost $1,000 per year. You’ll keep on paying that insurance every year until you’ve paid down more than 20% of the appraised value of your home. And unlike with a down payment, you don’t get anything for that money — it’s just there to protect the lender in case you default.

Last but not least, having a down payment protects you from going underwater on your loan, or owing more than the house is worth. This can happen when you buy without a down payment and then home values drop. It’s a real bummer if you want to sell.

You Aren’t a Saver

Speaking of a down payment, if you find saving for one to be a challenge, that in itself may be a sign that you aren’t ready to own your own home. When you’re a renter, all you have to worry about is covering your rent. Once you’ve done that, the rest is up to your landlord. When you own your home, the responsibility is all yours. So, whether your problem is a leaky toilet or a broken water pipe, you will have to pay to fix it (and in many cases, it’ll cost you dearly). Without a strong habit of saving, you’ll lack the cash to take care of all the expensive repairs you will face as a homeowner. If you’re already living paycheck to paycheck, the ongoing financial responsibility of owning a home is likely to land you in debt.

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You Have a Debt Problem

Another sign that you may not be a good candidate for home ownership is that you’re carrying a lot of debt or you struggle to avoid taking on debt of any kind. Not only will debt keep you from saving for emergencies, but those who can’t resist tapping into available credit may find their home’s equity irresistible. It’s not uncommon for homeowners to be tempted to use their home equity as a piggy bank through a home equity line of credit (HELOC) or home equity loan. This is especially true when home prices are rising (thus creating more equity).  According Bloomberg, HELOC lending rose by 30% in 2012, the highest level since the start of the financial crisis in 2008. If you’re not someone who can resist using available credit, steer clear of homeownership; not only will it allow you to dig yourself deeper into debt, but using your house as collateral could also leave you homeless.

You Have Bad Credit

If you have lousy credit, you may be able to find a lender who’s willing to give you a mortgage. That lender isn’t doing you any favors though. Bad credit makes you a high-risk borrower, which means that any lender you can get to give you the loan will charge you considerably higher interest and offer fewer options. This can make it more difficult to pay down your mortgage in a timely way — or at all.

You Think a Home Is an Investment

Real estate can be an investment — and a good one — but your home doesn’t count. In order to really be able to capitalize on any kind of investment, you have to be able to sell it when the time is right. That’s hard to do with the real estate you call home because, after all, you’ll still need somewhere to live. Plus, even if you are able to high-tail it out of your home when it appreciates, chances are you’ll have to plunk that gain right back down into your next house.

You Aren’t Into Maintenance

Whether it’s painting, weatherproofing or general repairs, homes require lots of ongoing maintenance. If you’re the type to put things off, homeownership may not be for you. After all, the longer you leave your rotten porch, the more rotten it’ll get – and the more expensive it’ll be to fix.

Many people feel that they should aspire to home ownership; many are even ashamed to call themselves renters. But while we tend to view a home of our own as a status symbol, we often overlook the fact that it’s a very big — and usually very expensive – responsibility. Owning your own home can be a great experience, but only under the right conditions. If home ownership isn’t a good fit for you and your current financial situation, chances are you’ll be too broke to enjoy it.

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Guest's picture
Shauri

All great realities on home ownership Tara.

Guest's picture

Great advice. But I think the 5 year rule of thumb might need to be rethought after the collapse of housing values.

Homeowners are more likely to come out ahead if they are in their homes for the long run. It may be time to stop thinking of "starter homes" and find the place you'll want to live most of your life.

It's much safer.

Guest's picture
Debbie Wood

Great advice, except that things can change and we don't always know when or how they will. We bought a house we lived in for 29 years. It was a good neighborhood when we bought but went downhill to the point that it was dangerous. Plus the house was small, would have been big enough for my husband and I in our old age, but our kids came home and brought their kids. Then my husband had health problems that made him disabled and the house wasn't working for us at all. It was a 3 bedroom, 1 bath home and at one point we had 11 people living in it. The cost to remodel and expand was higher than we could get a loan for so we ended up selling and buying a new place in another town away from the crime. We do plan on staying here for the rest of our lives, but who knows. Fate sometimes intervenes and we can't be prepared for everything life throws at us.

Tara Struyk's picture

Thanks, Pamela - interesting comment. The "starter home" is an interesting concept. Why is it that we always feel we have to be moving on to something better?

Guest's picture
Guest

We have been renting for two years, the landlord wants to sell because they can't refinance the mortgage below our rent. They've offered to sell to us at a price that would make the mortgage lower than our current rent.

We like the place enough, 3b 2.5bath, and we have 6 people living here.

Trick is, we want to move in a year or two. So, we've been asking ourselves if we think we could rent it instead of trying to sell it.

What questions would you all suggest we ask ourselves to help us decide if this would be a wise decision. Our, should we walk away and rent. Oh, rent around here is generally $400+ more than what we've been paying. And the market is slim to none for houses that are even $15k more than the landlord's opening offer.

Tara Struyk's picture

I wouldn't dare to give specific financial advice, but it might help to look at from the perspective of risk. In other words, take a look at the possible worst-case scenarios and decide whether these are something you could manage. Like:

-Could you afford to pay this mortgage and rent/buy another house if you couldn't find a renter or it took a long time to sell it?
-Are you prepared for the additional expenses of home ownership, such as property tax and repairs?
-If you have to sell the home in a couple of years, can you afford to lose some money on it or at least eat the closing costs you'll pay when you buy (I believe they're about 2 percent of the cost of the home on average)

Guest's picture

I agree that people shouldn't buy a home if they don't have a down payment. Unfortunately when we bought our house we weren't financially savvy yet. It's an FHA, but we're making great progress to do our baby steps and eventually pay it off. Thanks for the article!

Tara Struyk's picture

Thanks for the comment! I think that paying down the mortgage is key to making that work and it sounds like that's exactly what you're doing. Unfortunately, many people who haven't yet succeeded at saving their money might really struggle to pay that loan off quickly - and keep their hands out of the equity they build. I see the saving part as a bit of a test of will. At least it was for me:-)

Guest's picture

I'm a big fan of recommending the 15-year mortgage over the 30. If a person can't afford the 15-year payment, they really shouldn't buy. Most people aren't disciplined enough to get a 30 and pay it like a 15, and the 15 will save people so much money.

Thanks for the article!

Guest's picture
Leah

I bought my house partly because it was my dream home, but also because I DO see it as an investment. Now, I don't think that I'm going to "cash it in" one day to pay for retirement, but I fully believe that I bought in an area whose home values will appreciate in the upcoming decade.

And frankly, I don't think that's smart!

Guest's picture
Shawn

This was very helpful! I am getting married this summer and my fiance and I have been discussing whether to buy a house or rent. One of the reasons we were leaning toward buying was because we saw it as an investment. We have no money to put down, some debt that we need to take care of, and not much in savings. After reading this post, we are sure we need to rent for a while until we are a little more financially stable. We kind of already knew we shouldn't be buying a house, but you convinced us. Thanks for saving us the tie and hassle!

Tara Struyk's picture

Good luck:-) Buying a house is a great thing to get to look forward to.

Guest's picture

Another reason that you may not be ready to own a home is if you can't afford your ideal house yet. A lot of people are so anxious to own a home that they buy a "starter home" which they plan to upgrade in a few years when they are able. The transaction costs and risks associated with this type of plan are not worth the trouble. You end up paying mostly interest on your mortgage for a few years and paying for unexpected repairs which drain your savings even further. It is far better to rent for a few extra years to be able to comfortable afford a home that will make you happy.

Tara Struyk's picture

Great point. I'd also argue that people need to realistic about what's "ideal." Personally, I have dreams that far exceed my budget:-)