Section 2.1:  Houses

Fundamentals of Finance by Adam J. McKee

Finding a place to live is a significant decision, one that varies greatly based on individual circumstances and preferences. Whether you’re young and just starting out, or at any stage of life, the choice between renting and buying a home depends on your lifestyle, financial situation, and long-term goals.

For many, renting offers flexibility and freedom from the responsibilities of homeownership. It’s an excellent choice if you value mobility, anticipate changes in your living situation, or prefer not to commit to a long-term mortgage. Renting can also be a smart financial move in areas where the cost of buying significantly outweighs the cost of renting, especially when considering the additional expenses of property taxes, maintenance, and home insurance.

On the other hand, buying a home can be a worthwhile investment for those seeking stability and the opportunity to build equity. Owning a home allows for personal customization and can provide a sense of permanence and community. It’s true that homes can be expensive and require a significant upfront investment, but they also offer potential for appreciation in value over time. Additionally, a mortgage can sometimes be comparable to or even less than rental costs, especially in certain markets.

In addition to the initial costs and mortgage payments associated with buying a home, there are several hidden costs that potential homeowners should be aware of. These costs can significantly impact your budget and should be factored into your decision-making process.

Property Taxes: One of the most significant ongoing expenses for homeowners is property taxes. These taxes vary depending on your location and the value of your property. They can be quite substantial and tend to increase over time, so it’s important to research the tax rates in your desired area before making a purchase.

Maintenance and Repairs: Owning a home means you are responsible for all maintenance and repairs. This can range from minor fixes to major expenses like replacing a roof, HVAC system, or plumbing. These costs can be unpredictable and can arise unexpectedly, so it’s wise to have a contingency fund.

Utilities and Energy Costs: Homeowners typically pay higher utility bills compared to renters, as homes are generally larger than apartments and require more energy for heating, cooling, and electricity. Additionally, older homes may have less efficient systems, leading to higher energy costs.

Lawn Care and Landscaping: If your home has a yard or garden, maintenance can be both time-consuming and expensive. Lawn care services, landscaping, and gardening equipment can add up, especially if you value a well-maintained outdoor space.

Insurance: Homeowner’s insurance is usually more costly than renter’s insurance, as it covers the structure of the home, personal belongings, and liability for accidents. In certain areas, you may also need additional insurance for floods, earthquakes, or other natural disasters.

HOA Fees: If your home is part of a homeowners’ association (HOA), you’ll need to pay monthly or annual fees. These fees contribute to the maintenance of common areas and amenities, and can sometimes be quite high, depending on the services and facilities provided.

Renovations and Upgrades: Over time, you may want or need to make renovations or upgrades to your home, whether for personal enjoyment, efficiency, or to maintain the home’s value. These costs can vary widely depending on the nature and scope of the renovations.

Understanding these hidden costs is crucial for making an informed decision about homeownership. It’s not just the mortgage payment you need to consider, but also the ongoing and sometimes unexpected expenses that come with owning a property. Careful budgeting and planning are key to managing these costs effectively.

It’s crucial to remember that neither renting nor buying is universally superior; both are valid choices that depend on your personal and financial circumstances. For students and young professionals, for instance, the flexibility of renting might be more practical. Collaborating with family members to invest in property can be a strategic move, but it’s not the only path to financial security.

When considering a mobile home, it’s important to weigh the pros and cons. While they may depreciate like vehicles, they can be a cost-effective solution in the right circumstances, particularly when combined with land ownership.

Ultimately, the best choice is the one that aligns with your lifestyle, financial goals, and personal needs. Whether you choose to rent or buy, it’s important to thoroughly evaluate all factors, including overall costs, lifestyle preferences, and long-term plans. Both paths offer unique advantages and can lead to financial and personal fulfillment.

Become an Expert

To get a good deal on a home is one of the best deals you’ll ever get because of the amount of money involved.  Even if you absolutely hate to “haggle”, you simply have to negotiate when buying a home.  Real estate brokers always pad asking prices expecting you to make a counteroffer.  If you don’t you are throwing away huge sums of money.  To really understand whether or not you are getting a good deal, you need to become somewhat of a real estate expert.

A major element of home prices is the comparable properties that have sold recently in a particular neighborhood.  Months prior to purchasing, you will want to keep an eye on the homes that are selling that match the major characteristics of the type of home you are looking for.

How Much Can You Afford?

Going to a loan officer at the bank and asking how much you can get is a notoriously bad idea.  They’ll help you out, and that is a bad thing.  Very often, loan officers will give you an amount that will saddle you with a debt burden that you’ll find difficult to pay for thirty years.   Just because you can get half a million dollars doesn’t mean that you should!  An old rule of thumb is to never spend more than three times your annual salary on a home.  So if you are making $50,000 per year, then you should not buy a home for more than $150,000.  This has been made easier and more scientific by lending institutions on the internet.


Before you start looking for a home, you will need to know how much you can actually spend.  First, base this on a realistic budget.   You will also want to know if your lender will agree with your decision as to how much house you can afford.  One way to do this is to get prequalified for a mortgage. To get prequalified, you just need to provide some financial information to your mortgage banker, such as your income and the amount of savings and investments you have. Your lender will review this information and tell you how much they can lend you. This will tell you the price range of the homes you should be looking at. Later, you can get pre-approved for credit, which involves providing your financial documents (W-2 statements, paycheck stubs, bank account statements, etc.) so your lender can verify your financial status and credit.

Real Estate Agents

Real estate agents can be important partners when you’re buying or selling a home, and you may want to seriously consider using one.  This is especially true if you are a real estate novice.  (Although bank loan officers will do a lot of the stuff a real estate agent does in better banks). Their knowledge of the home buying process, negotiating skills, and familiarity with the area you want to live in can be extremely valuable. Usually, it doesn’t cost you anything to use an agent– they’re compensated from the commission paid by the seller of the house.  Remember that agents are not qualified to give you an official appraisal or do a home inspection.  Those are separate professionals.

Selecting a Home

Back in the day, you had to visit a lot of homes to find the right one.  Today, apps and websites can help you eliminate a ton of wrong houses.  While I encourage you to consider your home an investment, its usefulness to you and your family are the foremost consideration.  A home needs to have a location you’re happy with, a size that works for your family, a layout you like and of course, a price that fits your budget.  Given those important things, there are some important things you will want to consider so that your investment appreciates in value.

Remember the Realtor’s Motto: “location, location, location.”  A home’s location will always have a huge impact on its ability to appreciate (and depreciate) over time.  This is true because unless your property is a mobile home (then it will only depreciate), the location of the property is never going to change. You can gut the inside and do a complete renovation that would make the HGTV folks proud, but you’ll never be able to take a good house out of a bad neighborhood. Important aspects of location include school district rankings, access to parks, stores and restaurants and crime rates.  The average price of other homes in the area places a limit on what your home is worth.  No matter how much money you put into a house, the neighborhood it is in caps the ultimate value.  Be careful of overpaying for houses in “posh” neighborhoods; as the neighborhood ages and becomes less posh, property values may actually decline.

It is smart to buy a home that has some cosmetic problems because a lack of “curb appeal” can save you about 10% on the home.  If you can save 10% on a $100,000 home (That’s $10,000!), then it’s worth some sweaty weekends painting and landscaping!  Just don’t neglect the curb appeal elements yourself.  Nice looking homes keep the neighborhood property values higher, and your individual home’s value higher.  Peeling paint can also cause moisture damage, and can be very expensive to fix down the road.

Home Inspections

Typically, purchase offers are contingent on a home inspection of the property to check for signs of structural damage or things that may need fixing. Lenders usually insist on this; they don’t want to be left holding a mortgage with a money pit for collateral.  Your real estate agent (or lender) usually will help you arrange to have this inspection conducted within a few days of your offer being accepted by the seller. This contingency protects you by giving you a chance to renegotiate your offer or withdraw it without penalty if the inspection reveals significant material damage.

Both you and the seller will receive a report on the home inspector’s findings. You can then decide if you want to ask the seller to fix anything on the property before closing the sale. Before the sale closes, you will have a walk-through of the house, which gives you the chance to confirm that any agreed-upon repairs have been made.

Home Appraisal

Real estate agents are usually pretty good at determining the fair market value of a home.  The bank is betting on the home being worth a particular amount before they issue a mortgage, so they will insist on a professional home appraisal that they pay for so that they can be sure of the results.  The appraiser is a third party company and is not directly associated with the lender. The appraisal will let all the parties involved know that you are paying a fair price for the home.


One of the big takeaways from this little book is that debt is evil, and you should avoid it without fail.  I do understand that some people are not willing to save for 15 years to buy a house, and you will buy a house with borrowed money.  When you take on debt to buy a home, the debt is called a mortgage.  Some people call mortgage debt “good debt.”  That is a load of manure.  No debt is good debt, and if you take on a mortgage you should make it a priority to pay as little as you can to the bank.  There are all sorts of reasons that people will tell you that a large mortgage over half a lifetime are perfectly fine; those people are either bankers, or have been duped by bankers.  The first argument is that you are making an investment.  Most real estate in most markets most of the time does a good job of hedging inflation, and that’s about it.  Homes do not really generate new value like companies do.

Unless you are very lucky and buy a home in a market just prior to a speculative bubble getting started, you can expect it to appreciate at about the same rate as inflation.  That means that once inflation is taken into account, you are hedging your mortgage interest not at all.  The bottom line is that the family home is a lifestyle choice, and not an investment in the sense that you plan to make money with it over time.  Even if it does appreciate, you’ll have to sell it to realize the profit, and many people will not sell a family home for emotional reasons.  If you spend lavishly on a home, you are doing it because you want to live in a lavish home, not because it is an investment.  If you are paying interest for 30 years so you can have a lavish home far above your means, then get ready to die poor.

Every home buyer has their own priorities when choosing a mortgage. Some are interested in keeping their monthly payments as low as possible. Others are interested in making sure that their monthly payments never increase. And still, others pick a loan based on the knowledge they will be moving again in just a few years.  My advice is to never choose a mortgage based on the monthly payment alone.  Always keep in mind that loans cost you a ton of money in interest.  You want to get a good rate, so shop around before you choose a lender!  Also remember that the amount of interest charged is based on an APR or annual percentage rate.  The whole “annual” part means that every year you drag out the loan, the more interest you are paying.  When you choose a thirty-year mortgage, you are paying more in interest to your lender than you are for the house.

Some mortgages are known as a variable rate.  Avoid these like the plague.  If interest rates go up substantially, so do your monthly payments.  What you want is a fixed rate mortgage.  Fixed-rate mortgages allow buyers to spread out the costs of purchasing a home over time while making predictable payments each month. There are some crazy loan products out there these days, but 15-year and 30-year fixed-rate mortgages are the most common. You can normally make extra payments in order to shorten the loan term without incurring any prepayment penalties.

Consider the interest rate and time frame when you are deciding how much house you can afford.  Since houses are so costly, most people cannot pay them off in less than ten years.  My suggestion is to look at the 15-year mortgage market.  Let’s consider an example:  Say you want to buy a $100,000 home at 5% interest.  If you got a 30-year mortgage, your monthly payment would be about 537.00 per month and you will pay the bank $193,256 over the life of the loan.  If you borrowed the same amount at the same interest rate for 15 years, your payment jumps to $791 per month, but you only pay the bank $142,343 over the life of the loan.  This means you get the house paid off faster and save a little over $50,000!  If you have to stretch it out to 30 years just to make the monthly payment, you are looking at too much house for your budget.  You can always get more house by saving up a substantial down payment.

Become a DIYer

Depending on where you live, some home repair projects have to be done by professionals because of housing codes.  Sometimes it’s just smart to hire a professional because they are licensed and bonded and if they drop a tree through your living room, they have to pay for it.  These days, skilled tradespersons charge a premium once reserved for physicians.  Learn all you can about basic painting, landscaping, carpentry, plumbing, and electrical work.  These skills can save you thousands of dollars, especially if your home is starting to have a little age on it and the “honey do” list seems to have something on it every weekend.  There are tons of great DIY books out there, and YouTube has a video on how to make just about any home improvement.  The DIY channel and HGTV both have loads of shows that show you how to do some pretty amazing things.  Don’t forget This Old House on PBS!  Just make sure you understand the safety issues around whatever projects you undertake.  The savings from your DIY skills will keep saving you money for as long as you own your home.

References and Further Reading

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Last Modified: 01/22/2024

This work is licensed under an Open Educational Resource-Quality Master Source (OER-QMS) License.

Open Education Resource--Quality Master Source License

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