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Many consumers buy homes when they shouldn’t

Mark Levitt
By Mark Levitt

This article appeared originally in the February 2007 Levitt Letter.

I’d like to share with you some of the pearls I have harvested while working toward becoming a “wise-as-a-serpent” administrator. This series of articles is designed to foster good stewardship with our resources, owned by God and entrusted to us, Gen. 1:26-30. Allow me to gloss over the topics of spiritual growth, time management, intellectual development, health maintenance, and relationship building by acknowledging that they are more important than bank balances. Those older and wiser than I perhaps can use the basics here to initiate a constructive conversation with someone younger and welcome him or her to pick your brain.

Our biggest purchases are typically houses, cars, and funerals. Regular Bible reading helps protect Believers against society’s seduction to overspend in pursuit of happiness. The Bible’s lessons about greed, pride, disputes, and envy, go a long way toward inoculating us against impulsive, regrettable decisions. Let me share with you some fruits of my reading and experience. “Experience is the best teacher, but if you can take advice, the tuition is less.”

Many consumers buy homes when they shouldn’t. They underestimate the inevitable expenses, including maintenance, repairs, taxes, and insurance. They also overestimate how quickly their equity (the market value minus the debt) will grow. Ideally, home buyers will:

  1. Make a down payment of at least 20% of the home’s value. Doing this saves them the expense of private mortgage insurance, which costs about 0.7% of the loan amount each year.
  2. Have six months’ worth of net income in the bank so that should financial circumstances change, they won’t have to sell the house below its market value.
  3. Plan to stay in the home at least five years.

An amortization schedule, which some lenders and realtors offer for free, shows how slowly the first years of monthly payments reduce the debt amount. Some home sellers are dismayed to have to write checks at closing in order to sell their homes because the realtor commission, title policy, and other closing costs surpass their equity. For a house to be a worthwhile investment,a buyer needs to buy it at the right price, maintain it well, and market it properly once it has had sufficient time to appreciate.

To buy a home at the right price, buyers should analyze how much comparable properties are selling for per square foot of land and structure. Mortgage companies require general inspections, but buyers can learn more about a property’s flaws (and impending expenses) by also having the house inspected by a heating/ventilation/air conditioning specialist, exterminator and, if circumstances warrant, a foundation engineer, who might recommend a sewer test. Shooting a video throughout the home can help establish whether the seller has left everything he should. A videotape with the new owner’s furnishings, stored off-premises, can document insurance claims.

Tips: Land value does not need to be insured.

  • Lower deductibles often aren’t worth the extra premiums.
  • Paying property taxes by December 31, instead of a month later, when they’re typically due, allows a homeowner to take the tax write-off a year sooner.
  • Metal hoses on washing machines prevent floods attributable to cheap plastic ones.
  • Some security companies will install a free basic alarm system (several exits plus motion and smoke detectors) when homeowners pre-pay $300 for a year of monitoring—and then add components as homeowners prepay for subsequent years.

Part of my motive in sharing insights on home ownership with readers who can only afford to rent an apartment is to offer an example of the illusion of materialism. Whether you own a house, car, or boat, that item also owns you to the extent that you must maintain it and, like it or not, have a stake in its well-being. Selling what we have and giving the proceeds to the poor frees us from those burdens. The “burden” of a roof over our heads is worth bearing, within limitations, but we must not let society’s culture of consumerism seduce us into overbuying.

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