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Balancing mortgage rate (Comstock Images/Getty Images/Comstock Images)
Balancing mortgage rate (Comstock Images/Getty Images/Comstock Images)

Book Excerpt

Home ownership isn't for everyone Add to ...

The following excerpt is from Chapter 11 of Vesna Milevska's book Financial Hacks.

Chapter 11: Mortgages

Buying a home is one of the biggest financial and emotional decisions you will ever make. You must prepare yourself to make a knowledgeable decision and be comfortable with what homeownership involves.

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You should also be aware that many professional investment advisors believe diversification of investments is crucial to long-term success. Sinking most of your wealth into a house does not allow you to diversify. Thus, home ownership is actually the opposite of a good investment strategy. In some circles, it is now being acknowledged that the so-called wisdom of home ownership was actually a government strategy after the Second World War for preventing social unrest. The rich and powerful felt they could better control the majority if that majority felt they had a stake in society through fixed assets: their houses. The masses would be less likely to object to social conditions if they thought this stake was the ultimate dream. Hence, the American Dream was created through government policies and subtle advertising. The same thing happened in Canada.

Before you buy a home have an idea of the advantages and disadvantages of being a homeowner because a significant portion of cash is removed from your monthly income and you will be required to make certain sacrifices. Remember, the allocation of your income should not be more than 35% towards the payments on your mortgage.

One of the main advantages to being a homeowner is financial security-your home will provide you some financial security from capital appreciation if housing prices are rising. For much of the last fifty years in most Canadian housing markets, prices have been rising. However, there are no guarantees in life!

Statistically, homeowners are wealthier people. Also owning a home gives you flexibility and stability. Having a place of your own being able to decorate and adjust your home to meet your family and personal needs is another benefit. As well, you won't ever have to deal with a difficult landlord. However, it will mean all the repairs will be up to you.

Although it is an exciting and great idea you should be prepared for the disadvantages of owning a home. The most important is the financial stress that goes with paying a down payment, meeting regular payments, and on-going cost. The maintenance expenses require money and time along with repairs and keeping your home in shape. Do not forget property tax and bills which are usually higher than when you rent, mainly because you property taxes are based on the value of the property and rental units tend to be smaller and to occupy less space. Buying a house locks you into some very heavy financial commitments, sometimes for a very long time (see amortization in the tips section below).

Before deciding that you want to own a home, the first and most important question is ARE YOU FINANCIALY READY? Have you done your net worth and cash flow statements? To avoid surprises calculate your net worth, your monthly expenses, and current debt payments. This will give you an idea how much you can afford to put as a down payment.

Some of the basics were covered in chapter one. I will not go into the calculations regarding mortgage financing. You can find simple calculators on any financial website. They all work from the same formula and give you a good idea on how big a mortgage and maximum price of a home you can afford. You should first think about paying your existing debts (if you have any), which will allow you to qualify for a higher mortgage or save for a larger down payment. Before I approach all the terminology and different mortgage options, I would like you to consider the most important factors in finding a right home.

You need to consider the size of the home. How many bedrooms or bathroom do you need? Do you need a garage, an office, storage space, or any other special features? When you start your search make sure your most valued features are included. Many people find that in a short period of time they need a new home because they have outgrown what they chose. Many people end up buying a different house every few years and, in doing so, face expenses that eat into the equity they have been trying to build, such as transfer fees, legal fees, home inspection fees, moving expenses, mortgage fees (yes, you may pay fees each time you get a new mortgage).

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