Many people have differing opinions on renting or owning their place of residence. In reality, most people have an opinion based on the specific circumstances they have lived through. When I was much younger, I vowed to never rent because I felt it was a waste of money. Why would I pay off another persons mortgage when I could get a loan myself? Let me give you a little insight as to how that viewpoint punched me right in the face.
My Dumb Mistakes Make Me An Expert!
It was 2004, I was 21 years old, and I had just landed a pretty good career. Compared to my past job of waiting tables, this new career greatly increased my income. I was living with my parents at the time and they were charging me minimal rent. I wanted to move out and get my own place as you can imagine, but I didn’t know where to look. I did know one thing – I wasn’t going to rent an apartment, I was going to get a loan and buy a home.
My earlier viewpoint was that apartments and rentals were a waste of money. Why would I help pay off another persons mortgage? I was no fool – or so I thought. If you remember the housing prices in 2004-2005, you remember how incredibly inflated they were. I found I was not able to buy the type of home I wanted because everything was so expensive. I could not get pre-approved for the amount needed to buy a nice home. Rather than giving up and renting something cheaper, I took my pre-approval letter and worked with my realtor to find the nicest thing I could afford.
If you have been through the home buying process, you understand that banks (at least 15 years ago) would pre-approve you for amounts much higher than any one person could possibly afford. My 21 year old self didn’t understand that and there I stood with a letter saying how much money someone was willing to give me.
After looking around for a relatively short amount of time, I fell in love with a 2 bed, 1 bath condo. I had to have it and it was right at the top of my pre-approval amount. Unfortunately, I didn’t have the money to put the 20% down for a conventional loan so I did the next “best” thing. I got an 80-20 loan with a 5 year ARM interest only loan. I paid 80% of the total purchase price with one bank loan and the other 20% was another bank loan to give me the down payment. For 5 years, I would be locked into a low interest rate which made my monthly payment affordable. After 5 years, the interest rate would change depending on the state of the market.
As I type this I want to punch myself in the face. I was paying only interest on my loans and nothing on the principle. What in the world was I thinking? I was 21 and very dumb – and definitely not thinking what could happen after the 5 years was up. What a moron I was (and sometimes still am!). Well, as you can imagine, after 5 years my luck ran out and my payment skyrocketed. I was unable to pay the mortgage and was left with an embarrassing stain on my credit for the next 7 years.
What Should I Have Done?
If I could tell my 21 year old self anything about this process, I would tell him to use some common sense and stop relying on emotion during purchases. This would have been the best process for me:
- Stay at my parents as long as I can until they kick me out and continue to stockpile as much cash as I can for a large down payment on a house.
- If I couldn’t take living with my parents anymore, find a place to rent with a reasonable lease that would allow me to stockpile cash for a large down payment on a house – or pay cash for the house!
I went out into the world thinking that renting was a stupid idea. Turns out I rented my small condo for 5 years and then left with a black mark on my credit. If I had rented a home or apartment, chances are I would have been able to find something much bigger than my condo for much less than I was paying each month. This would have allowed me to save up at least 20% to avoid paying extra due to the private mortgage insurance.
So Is Renting A Waste Of Money?
It depends. If you do not have a substantial amount of cash saved up to make a significant down payment – renting for a few years is the smarter move. If you want a home and have a significant amount of cash saved up, you can either purchase a home or continue to save until you can pay for it in cash! Yes it is possible to pay for a home in cash without being a millionaire. It takes persistence and patience but it can be done. I unfortunately did not start out with a good financial choice which has hurt me many years after.
Even after my dumb mistake, here I am now 35 years old and I’m about 2 years away from paying my current home off. That will be quite the celebratory blog post I assure you!
Are you a financial expert because you have made mistakes and learned from them? Or are you in the process of becoming a subject matter expert? Either way, I assure you it is possible to get out of your mess and to improve your current situation.
Before you purchase that home, please check out my related articles. Purchasing a home with debt is a bad idea. Get that debt paid off first before you go into further debt with a home loan! Budget Isn’t A Bad Word,and Simple Steps To Start Your Debt Free Life!
What are your thoughts on renting? Comment below, I’d love to hear your thoughts! If you haven’t signed up to receive future articles by email, please add yourself at the bottom of this page. If you have topics you would like future blogs about, let me know and I will add them to the agenda. Stay safe my friends -you work too hard to be this broke!