Thursday, December 24, 2009

Buying a House But Not for an Investment

We all do not need to be told that US economy is passing through a turbulent phase. Talk to any individual who has slightest interest in economy and/or investment process, they will tell you the housing is the root cause of our economic malaise. One would imagine that everybody would learn from past mistakes (i.e. particularly mortgage practices) and hopefully do not do repeat it. Sometimes I do not get that feeling, and many times who will feel stakeholders have different objectives and hence knowingly they keep repeat it.

I am looking to buy my first house and hunting for good mortgage rates. I am surprised how there is no change is predatory practices. My wife and I have an excellent credit history, zero debt, and have decided to put down payment of up to 40% total house price. Every lender and real estate broker is attempting to project buying house as an investment. It is being projected to me that it will be part of my wealth. We are being encouraged to not put more than 10% (in some cases no more than 20%) as down payment for the house. There is one lender who is willing to provide load upto 95% i.e. only 5% down payment. Intriguing!

I may not be an smart investment banker, but I just cannot understand how a house (primary place for living) can be considered an investment or part of my wealth. In my view, owning a house as primary dwelling is more of our responsibility to family. It is our current expenses, which we need to manage using good quality of earnings (like good quality of dividends). Even if we did not own a house, we would still need a place to live. It is highly likely that for similar standard or quality of living, one would probably end up paying same level of rent.

The most interesting part is, almost all of them run the same tape record that once you fully pay the mortgage, it will be your asset. Over time, housing increases in value. Think over it for a minute. Assuming the value of house increases, what does it really mean? If I want to live at another place, I will have to probably end up paying similar high amount for same standard of living. Where is the value for me? Where is my wealth?

So why brokers and lenders want to lend more? So that they can get PMI and they can get higher commission. The higher the loan amount they sell, based on fixed percentage commission, they can get higher fees and commission. They do not seem to be interested in providing you a good value. They are more interested in squeezing higher amount of loans and higher commission from themselves.

At best, buying a house using mortgage is preserving value of your money. The rental amount is lost forever. However, in case of mortgage, you are keeping it with you. Sometime is future, you will not have to pay the rent. Finally, how can you measure the intangible benefits like enjoying house with your family and friends, the quite and peaceful sleep that you have day in day out, etc. You work hard to live and have fun. Can you really put an ROI to it?

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