Welcome to Taking Stock, a space where we can take a deep breath and try to figure out what the COVID-19 economy really means for our finances. Every month, personal finance expert Paco de Leon will answer your most difficult, emotionally charged questions about money. This year has forced many of us to reprioritize our finances, and there’s no clear road map for getting through the pandemic yet — but Taking Stock is here to help us figure it out together.
This month, we’re talking about at what point it just isn't worth it to own a home anymore. Are you currently a homeowner, or were you a homeowner in the past? Tell us about your experience here to be featured in an upcoming Refinery29 story.
So, I bought a house a couple years ago. I admit the mortgage was difficult to pay in the first place, but then I got laid off last year due to COVID. I know I could look into refinancing, but I’m wondering if that will make enough of a difference when I feel so in over my head. This mortgage will be a very long road, but back when I bought this house I was determined to become a homeowner at a young age instead of paying rent. Now I almost feel like I was deceived a bit, or like I've snapped out of a fantasy. I was told that this house and mortgage would be totally within my means — I qualified for it —but I was stretched thin and felt shaky financially once I started paying. Once the mortgage forbearance ends I’m dreading how I’ll make ends meet, and how my quality of life will go down because I have this big financial burden every month, especially if I can’t find a job that pays at least as much as my old job.
I guess my question is: Is it always worth seeing this kind of thing through? What are the paths left open to me right now?
Dear In Over Your Head,
In America, homeownership is the ultimate symbol of security and financial stability. Still, the irony is that plenty of people find themselves in a situation where owning a home creates the exact opposite financial situation. A Bank Rate survey found that nearly two-thirds of millennials regretted buying their homes, with 20% citing expensive maintenance costs and 13% blaming they regret overpaying.
The housing market has been reaching peak ridiculousness. It’s not surprising that many folks who have recently purchased homes are waking up to the harsh reality of whether or not they can really afford them. If that’s your predicament, your next move is to take a panoramic view of your situation to find a suitable solution. Find the option that will balance your long-term financial goals, short-term affordability, lifestyle, and your quality of life.
Find out about your refinancing and loan modification options
Even if you think refinancing won’t make a difference, it is an option that is worth exploring. Aside from traditional refinancing routes, two federally backed programs, the Fannie Mae High LTV (loan-to-value) Refinance Option and Freddie Mac Enhanced Relief Refinance, may be available to borrowers with higher-than-standard LTV ratios.
A loan modification is different from refinancing because you work directly with your lender to change the terms of your current mortgage to make it more affordable. Loan modifications are typically free, whereas traditional refinancing usually comes with costly fees. In addition, a loan modification may lower your interest rate, reduce the principal or extend the length of your loan. Reach out to your mortgage lender to start this conversation and learn more about available options.
Run the numbers on “house hacking”
Let’s be clear, ”house hacking” is simply start-up speak for becoming a landlord. If you decide to go this route, know that most landlords aim to generate enough rental income to completely cover their housing expenses or even to profit from their real estate. But, you don't necessarily need to do that — you could simply offset your mortgage and housing costs to feel less financially stretched.
Before you post an ad on Craigslist, spend some time understanding the economics of being a landlord and run the numbers. Figure out how much you could potentially earn by renting out extra bedrooms, then compare that to your current housing costs. One other consideration is how rental income may impact how much taxes you pay.
Can you afford to sell?
Selling your home is a viable option if you're determined to get out of your house. The first step would be to find out how much your home is worth by getting an appraisal or an opinion from a real estate professional.
With house prices being so high right now, you may be in the 50% of Americans who have seen price appreciation in the double-digits. A healthy price appreciation may be enough to afford selling early and violating the five-year rule. The five-year rule is a general rule of thumb that says you shouldn’t sell your home within the first five years of purchasing it. This helps you recoup the transaction costs required to buy and sell, which typically cost 7 to 15% of the home’s price.
If the value of your home has not appreciated enough to cover most of the closing costs, you’re faced with the decision of whether or not you want to cover those costs out of pocket. Is it worth it to get out of the house? Unfortunately, there is also the possibility that you owe more than what your home is worth, which is called being upside-down or underwater. Selling is not likely a viable option if this is the case, and you’d be better off with a loan modification.
The largest financial transactions in most people’s lives are buying and selling their homes. The decision to do both of these things is very personal. Ultimately, the economics need to make sense, but you also need to weigh the toll that financial stress takes on your mental and physical health.
Is your home really an investment?
Most people believe their house is an investment because they assume that in the long term, it will appreciate, and they’ll make a profit once they sell it. Of course, your home could be an investment, but I’d like to explore reasons why it may not be.
You purchased a residence to live in, instead of renting it out or selling for a profit. Its primary purpose is for shelter and not as an investment. The regular carrying costs associated with homeownership arguably make it less like a typical investment. Most investments don’t require a continuous investment of cash to carry them.
Additionally, the returns aren’t all that awesome compared to other investment options. Historically, housing tends to appreciate at the rate of inflation, and a house will typically generate a lower return than the stock market. Owning compared to renting may be a better investment — so long as you can afford the house. Investment returns can easily wipe themselves out if the cost of carrying them puts you into credit card debt or a financially precarious situation.
How to be okay with renting
I hope you see that you have options and that you can even choose to combine two of them. You could try to get a loan modification and decide to take on tenants. If you feel burned by your housing purchase to the point that you truly want to sell, what can you do to feel okay about that too? How will you feel about renting again?
From a practical standpoint, you can build equity in a sense when you’re renting. Whatever you save in housing costs can be diverted into investments with a higher return, like the stock market. From an emotional perspective, I suggest examining the narrative you've told yourself about what homeownership means to you.
How did you become a young homeowner? Did you fall into homeownership or was it an important goal that you achieved, and why? Where did that desire to identify as a homeowner come from? Answering these questions will help you see what was driving your determination in the first place. It’ll force you to unpack whether or not the underlying narrative you’ve told yourself is important and necessary for your future self. Was your decision based on the fundamentals of your personal finances or based on an idealized identity? If it was the latter, know that you can write a new story about the kind of person you are — whether it's someone who rents, someone who has a tenant, someone who buys their house at a young age only to sell it at a relatively young age, too. Someone who learned a lot about markets and themselves along the way.
Your finance friend,
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