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Buying a House is Not Always a Good Idea

Many people rush to buy a house the moment they have sufficient savings to make the down payment. The reason given is that paying rent is like throwing away money when you can instead make mortgage payments and create a big asset. But an often ignored fact is that there are a lot of costs involved when you are buying a house other than the cost of the house itself.

And when you take all these into account, you might just realize that renting would be a better option.

Most people have to take a mortgage to buy a house. This means that you would have to pay interest month after month for a long time. If you have taken a mortgage for $300,000, you can expect to pay about $15,000 as interest in the first year itself. Although you would get a tax break on interest payments, you would still end up paying a huge amount in interest by the time the mortgage ends.

You should also consider process related costs that would be involved in taking a mortgage. These could include closing costs, administrative fees, legal fees, appraisal fee, processing fee etc. And if you try to close the loan earlier, you would have to pay a prepayment fee. Add up all these costs and buying a house might not look like such a good idea any more.

Another factor that you should think about is that you have to make a large upfront payment to buy the house. No lender will be financing the whole value of the house. If you are lucky, you would have to pay about 10-20% of the price up front. This means that as soon as you close the deal, your finances might become stretched.

You may also have to spend on refurbishing to make the house more suitable for your family. So unless you have a high income or you have a lot of savings, you might face an uphill struggle to make your monthly mortgage payments.

Finally, you should not ignore the lesson of the recent housing market crash. House prices do not always go up and you could face serious declines in the value of your property in a few years. If that happens, you would be stuck with a mortgage higher than what the house is worth. So unless you are completely comfortable with your financial situation, it might be a better option to rent a house instead of buying an expensive property.