You sent us your money questions, and we asked Michelle Singletary, The Post’s award-winning personal-finance columnist, to share answers. Below you’ll find the second in a five-part series of Q&As; check back each week for the next installment.
A: If you were attending one of my financial workshops and asked this question, I would immediately ask: Do you have student loan debt?
If your answer was “yes,” I would then ask: How much debt are you carrying?
Whether it’s a little or a lot, I would advise that you not buy a home until you get rid of the debt.
If you have a significant amount, which could be the case if you’re in graduate school, I would say “hurrah” for deciding not to buy a home, because you may already have a mortgage-like obligation in monthly student loan payments.
I believe you should be as debt-free as possible before buying a home — and yes, that means not having student loan debt.
You may be thinking: “This woman is insane. I’ll never be able to get rid of this student debt in time to buy a home before retirement age.”
And if you are thinking this, that’s exactly why you are not ready for a big mortgage. I only need to point out the financial devastation people are experiencing because of the pandemic. Imagine if you have a mortgage and student loan debt and then lost your job.
At least if you’re renting, you can get out of the lease and move in with someone to cut your housing costs. Renting allows you to easily move to another area to find work. Perhaps you could even go back home and live with your parents or share housing with a relative who won’t charge you rent so that you can get rid of your housing expenses while you regain your financial footing.
I also need to say this: Renting is not a waste of money. You are not a financial failure if you rent. You are getting something for your money — a roof over your head.
And know this — you aren’t alone if you’re second-guessing homeownership.
“Americans are less positive about homebuying now than at any time since the mid-2000s housing bust and ensuing economic recession,” according to a 2019 report by Gallup.
The Gallup survey found that even before the pandemic, only 61 percent of Americans believed it was a good time to buy a home, down from a high of 74 percent in August 2005. American optimism about buying wanes when housing prices and mortgage rates rise.
Gallup also said that an increasingly limited supply of affordable homes corresponds with less enthusiasm for homeownership.
“Young adults seeking to purchase their first home may be particularly discouraged by a lack of available housing in their price range,” according to Gallup.
On the question of renting vs. owning, read this: Should I rent or buy a home? That’s not the only question you should be asking.
You’ll find this one key piece of advice: You should buy your first home when the time is right. It shouldn’t be because someone else or society is pressuring you to buy. Don’t buy just because housing prices or mortgage rates are dropping.
I recommend you read “100 Questions Every First-Time Home Buyer Should Ask” by Ilyce R. Glink, a syndicated columnist and real estate expert.
“Here’s my basic philosophy about home-buying,” Glink writes. “You’ve got to be honest with yourself. Honest about how much money you spend (and where you spend it), about your priorities in life, about how and where you actually want to live. … Just because you have (or think you have) the down payment cash available and interest rates are still low, that doesn’t automatically mean you should buy your first home right now.”
By the way, the calculations that go into owning a home shouldn’t just stop at comparing the monthly mortgage payment to your rent. Many online calculators that help determine if buying a home is right for you are heavily biased toward homeownership.
A home can be a money pit. As a renter, if your toilet breaks, you call the landlord. If you own, you’re the plumber or you better have the money to hire a professional to stop the leak.
Don’t buy a home just for the tax break, either. Homeowners can deduct the mortgage interest they pay. But you can only take advantage of this tax break if you itemize.
Additionally, this tax break is a deduction, not a credit. A tax credit reduces, dollar for dollar, the taxes you owe. A deduction eliminates only a percentage of your income subject to taxation. The vast majority of homeowners don’t even claim the mortgage interest deduction. They take the standard deduction because it’s more lucrative than itemizing.
Eventually, when you are ready to buy, try out the new mortgage and all the rest of the expenses for your home. By this I mean, calculate how much you’ll pay each month, including any homeownership association fee, taxes and insurance. Budget for future maintenance costs.
For instance, if your rent payment is $1,200 a month but the mortgage and other expenses would add up to $1,800, see how you handle the extra $600 a month by putting that money in a bank account. I want you to feel the financial pressure of homeownership. It’s a practice for when you buy.
Lastly, you asked about red flags to look for when searching for a property.
The biggest trap is listening to a real estate agent or bank on how much house you can afford.
“The way economists (and real estate agents and brokers) think about it, your earning power is going to go up while your mortgage will be locked in for 15 or 30 years,” Glink writes in her book. “So, they think, spend until it hurts now and your income will catch up later.”
But such thinking often ignores the cost of maintaining your home over the years (this is going up too), and that “the rest of your life is also going to get more expensive,” Glink says.
Please don’t underestimate the cost of homeownership over the long term. That’s one of the biggest mistakes buyers make.
