My post about what they didn’t tell me when buying a house had some good dialog. One of the things that came up, because I mentioned it off handedly in my post, was about equity. I figured I mentioned it, so I might as well share a little of my thoughts concerning it too.
First of all, “Equity” is a word that gets thrown around a lot when you start looking for a house. I realized the big selling point to buying instead of renting is sort of focused in the “Building Equity” vs. “Throwing away your Money” debate. This debate is usually based on the assumption that you can find a house with a mortgage payment equal to what you were paying for rent and thus slowly be building equity in a home (granted it will take 30 years to get there) rather then giving all your cash to your landlord.
With one exception, we’ve spent less then $500 a month on rent (including all utilities and phone/internet), on average about $400. Granted, this has involved sharing our living space, but the reality is it was only $400 a month coming out of our pocket. I see their point about building equity, but I still see the argument being made with an assumption of how much you should or need to spend for your basic living cost.
Secondly, “Equity” is based on the idea that your home has X dollar value. That is you have Y equity because your home is worth X dollars and you only owe the bank Z dollars on it. However, like my mother always told me about my baseball cards growing up, “They’re only worth that if someone is going to pay you for them,” and more specifically to houses, “if your going to sell it.” I don’t plan on selling our house. Not now, and not for the long foreseeable future. That being the case, the only benefit the X dollar amount has to me is to determine how much I owe in real estate taxes.
Finally, “Equity” is valuable to most people, because it allows them to stay in a continuous cycle of debt pursuing bigger and better toys. If you have “Equity” in your house, you can get a loan from the bank to buy a boat, or a jet ski, maybe a vacation home. Granted that pretty much means your tossed your “Equity” out the window, but hey, it’s your equity so who am I to judge. This house is the last time I plan on borrowing money ever (I’m young and maybe naive so I might be silly for saying this).
So, Equity, Shmequity, I’ll just take the House, Thank you very much.
Ariah, good discussion.
First of all, being a home owner, I totally understand the urge to fix it up and build equity. I started out with a large fixer-upper condo that definitely needed some repairs…carpets with permanent dog and cat pee odor (eek), light fixtures missing from ceiling in several rooms, big holes in drywall, etc. Over the course of a year or two, I spent more than ten thousand on that house, the major expenses being the addition of wood floors to 2 floors of the condo. I knew Home Depot.
(On a side note, thank you to the one who suggested yard sales…and I’ll add dumpsters, where several pieces of our current furniture have come from…a great way to fix up a place for very low costs. And, if you have family, great family projects that emphasize the value of community contribution.)
I think the question of equity is definitely more complex than most would like to admit, and you make that point well. It’s much more than a simply saying that anything you fix or add or do to the house adds equity. It involves when you want to sell the house, if ever. You have to consider houses around you (spending $100,000 fixing up a house in a neighborhood where the highest priced home is $89,000 isn’t a smart real estate decision). There are plenty more things to consider when determining how much equity an addition will actually add. But I’m not a realtor.
What I am (and what you are) is a Christian. One who desires to live like Christ daily, not just in praying and theological belief, but in actively pursuing justice, peace, and life by loving God and our neighbors. With that in mind (as it should be), I think there are certain questions specifically related to finances that just become irrelevant. Meaning, they don’t apply to us.
We have to be ok with doing things that go against sound financial planning. I truly believe that. I hope that, if anyone were to know how much I’m putting in my IRA, they would tell me that I’m not saving enough. Why? Because I’d much rather be poor in my retirement than be asked by God why I laid up treasures on earth. I’d much rather miss out on the opportunity to make $20,000 on a house than miss out on a chance to house a family in Haiti.
I was going to go on and talk about the argument of stewardship, but I’d be chasing a rabbit. I’ll leave it at that.
The main point I’m trying to make is that, once someone determines the best financial decision regarding equity, everything just might change when we apply Christ’s teachings to it. Or, even simpler…God doesn’t guarantee home equity (or home ownership period, or a work free retirement, or even a car), but he will give us the things that we need.
It’s just that he’s having a little trouble giving all his children the latter since most of us are worrying with the former…
You are young. And silly. And I applaud your commitment and your conversations.
I loove you guys.
I’ve been looking around Boston where i live and thinking about purchasing my first home. One of the things that I have learned about is the amount of interest you pay on your mortgage.
When you go to purchase a house they get you to look for a low interest rate and a low monthly payment, but no one tells you about how much that interest adds up to be in the end.
At the end of 3o years you will have spent double on your house when you factor in all the interest you have paid. Sure you will have all that “equity” but look at how much you have spent to get it.
We have been in our house just over 10 years and the value of our house has more than doubled. I see it as good stewardship, and for those with little income over expenses, it may mean your only retirement or financial investment.
To Brian: Good point. People talk about throwing money away for renting, but forget that we throw thousands upon thousands away in interest with a home purchase (especially if we pay it off averagely).
To Andy: Another good point! Home value is one thing we can generally count on to only increase (just keep in mind that just because you’ve had success, and so have I, it’s definitely not 100% guaranteed). Dave Ramsey says (or used to, anyway) all the time that cars go down, homes go up in value.
And your point about a home purchase being one’s only investment if they make little more than expenses is an interesting one. I’ll just offer a couple of discussion ticklers. 🙂
1) For the person who makes little income over expenses, how many of those expenses are needs; how many are wants?
Most people live at least something like their income. Meaning, if they make $40,000 a year, they’ll not live on $19,000. If they earn $120,000 a year, it’s probable they will live a high standard of living which meets or (usually) exceeds that income. Obviously there’s a point where extra income isn’t needed, but it’s just adding luxury. So even though income may barely exceed expenses, one option is decreasing expenses to just the vital needs…and all of a sudden that person could have plenty left over.
For the one who can truly barely afford rent, though, that’s something to consider. However, I also worry for that person…owning a home is so much more expensive than simply switching from paying a 600 dollar rent check to a 700 mortgage fee. Right, Ariah? 🙂
2) What is the advantage of our home value doubling? That sounds stupid, I know, but unless you actually sell it, isn’t that a moot point?
Here’s one advantage, though. What if a thousand Christians decided to sell their nice homes that are now worth a lot of money and buy smaller, less expensive ones…sharing the excess with the poor? A lot. Tens or hundreds of millions would be given to providing poor with medicines, shelter, education. I’m not suggesting we should look at it legalistically, but that Christ followers should seriously reread all the passages concerning riches and start having fun with sharing our wealth.
I go back and forth on the issue of stewardship, and of investment and saving. My wife and I save some, and again, we do own a home that we rent out. It was and is a great investment, financially speaking. But sometimes I wonder if it’s the best idea to keep it. I’m excited about all the possibilities…
Great thoughts and comments all around.
Funny to look back on this two years later, after the economic downturn and everything, and thinking about blogging about the topic again. Great conversation, thanks everyone!