For one reason or another, there are only a select few of us that don’t have an interest in buying our own home. Having that 3-bedoom, 2 full-bath split-level contemporary on a quiet cul-de-sac isn’t for everyone, and shouldn’t be either. Even though it has its many perks, home ownership is a big responsibility and shouldn’t be looked at in any other way- especially with the recent leveling off of the real estate boom. In fact, many current homeowners are feeling the squeeze of the cooling housing market and rise in interest rates and are stuck between a financial rock and a hard place. Don’t let yourself fall into this type of situation- take your time, shop around, and ask yourself why you really want to buy that house. With this in mind, here are 3 times when buying that house is not a good idea (and some alternative ideas for you to think about instead):
If you’re buying that house just for the tax deduction
Even though April 15 is much easier for those with a mortgage interest tax deduction, the idea of buying a house for this reason only is nothing short of ludicrous. In fact, the feds are currently in the process of yet another tax reform bill. President Bush's Advisory Panel on Federal Tax Reform is recommending a drop in the mortgage interest tax deduction from the $1,000,000 current total home loan mark (plus an additional $100,000 in home equity loans) to between $300,000 and $500,000. Sure, there aren’t a lot of us going home to a million dollar property every night, but the bill has the potential to eliminate the interest deduction altogether, leaving only a 15% credit in its place. This can add up to hundreds (or even thousands) of dollars come tax time, depending on how much interest you pay and how much money you make. The odds of this bill passing seem to be slipping in our favor, but it’s still on the table, leaving a bad reason for buying that house just for the tax deduction.
A good alternative would be to invest some cash into an IRA or an employer-matching 401K. The feds are rewarding those who save, especially for retirement. Plus, there’s a loophole in retirement savings that allow you to take money out without the normal penalty for buying your first home.
If you’re buying that house because it’s better than your sister’s house
Your sister may have a beautiful 5-bedroom, 3 full-bath colonial on 17 acres of land, complete with an Olympic-sized, in-ground pool and guest house in the back, and a BMW 7-series parked in the driveway. She might also have a $5,000 a month mortgage payment, $800 monthly home equity loan payment, and a car note beyond your wildest dreams. At some point in our lives, we have an epiphany that having the best of everything usually comes with having the highest of bills. Do you really want your monthly payments that high? Will you have enough money left over to buy food? You can’t rely on lending institutions to tell you how much of a loan you can afford, as banks usually pre-approve you for more than you can really budget.
A good alternative would be to buy a home that doesn’t leave you rolling pennies for gas at the end of the month. You can often find good deals on homes that have a “TLC” tag, which means that even though the house needs work, it’s all cosmetic. Odd are that you will be painting and replacing flooring anyways, so why not get a deal on the house, leaving you with bragging rights for how small your mortgage payment is.
If you’re buying that house even though it’s very overpriced in a cooling housing market
No matter how much you love that house, you will run the risk of dealing with negative equity right off the bat. This can mean more money that has to come out of your pocket at the closing, a higher mortgage interest rate, and the unfortunate possibility of having to pay PMI (private mortgage insurance) each month on top of the higher interest rate. If you finance this house with an adjustable rate mortgage, the interest rate will adjust (always up) at the predesignated time, leaving you with a ridiculous monthly payment and the inability to refinance due to the home’s value and the amount you need to finance.
An alternative would be to hold off and wait for the current owners to drop the price. Keep looking at new and older listings, as your perfect home might just fall into your lap while you’re waiting.
