by Joe Kirkpatrick
The long time American dream for most people is to own their own home. Politicians still often make the statement that "Every American needs a chance to own their own home." The fact is, home ownership is just not financially practical for many Americans. Sixty or seventy years ago, the mentality of the American homeowner was to get their home paid for, then live out their years in that home debt free. That mentality was what made owning a home practical. Today, most people who don't have their first home paid for often sell it and use their equity to buy an even bigger home. I have friends in their 60's that are even doing that, and taking on a mortgage and making payments on it until they are 85 - 90 years old. Based on the average life expectancy of the average American, most will die before their mortgage is paid off.
A Tale of Two Young Couples
Let me tell you a true story about two young couples, each with one child, and each with similar incomes. One of the couples rented a three bedroom, one and one half bath rental rental house I own in a nice neighborhood. When they rented it three years ago, the rent was $750 per month. I provide all of the maintenance as well as lawn care. During the past three years, I have unplugged the drains twice, replaced the electrical circuit to the dryer, and replaced the heat pump. Their total monthly expense still remained $750. No matter what goes wrong, this couple knows their monthly housing expense will remain the same. Also, I consider the relationship between a landlord and tenant to be a partnership: If they are good renters and follow the terms of the lease agreement they signed, I do everything possible to take care of anything that goes wrong as quickly as possible because I want them to keep renting from me.
About the same time, the other young couple bought a three bedroom, one and one half bath older house also in a nice neighborhood. The purchase price with closing costs was around $110,000, with a monthly payment of approximately $875 per month for thirty years including taxes and insurance. Not too long after moving in, they began having some plumbing problems. What began as fairly routine problems grew, and grew, and by the end of the two year mark, they had spent over $5000 without completely solving the problem. At this point, their savings are depleted and they just simply cannot afford to have any more repairs done.
The average home value in our county, Bradley County, Tennessee is $91,700. The monthly payment for a $91,000 home will be $492 per month, for thirty years, not including property taxes and insurance. Add the taxes and insurance and the payment will be about $700 per month. During the real estate boom from 2003 thru 2008, many homes in this price range were sold with no down payment required. If a family cannot save up enough money for a down payment, how can they be expected to save up an emergency fund for repairs and maintenance? Let's look at what some usual maintenance items cost that will almost definitely be needed during a thirty year mortgage on a 1200 sq ft house: Tear off shingles and replace roof $3600, replace heat pump $3500, repair a sagging foundation $5000 - $20,000, replace a water heater $600 - $900, have a plumber unclog a drain $90-$180, replace a faucet on a sink $250, and replace a septic tank and field lines $5000 - $8000.
Owning your own home can be very rewarding, but only if you can afford much more than just the monthly payment. If you do not have the ability to do that, keep on renting and you will be better off financially in the long run.