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Financial personality Ramit Sethi recently mentioned that some people question how he can be the “I Will Teach You To Be Rich” guy if he rents instead of owning a home. However, Sethi has run the numbers several times and continues to demonstrate how it can be more expensive to own a home than to rent one.
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He elaborated further by stating that home equity is overrated. It’s one of the common reasons why people become homeowners, but a deeper look at how mortgages work, phantom costs, and other details paints a less optimistic picture for owning a home as an investment.
“The housing market is quietly bankrupting millions of Americans,” he said.
Sethi made several great points when arguing that home equity is overrated.
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Sethi quickly claims that homeownership can turn into a financial trap in his video. He mentions phantom costs like property taxes, maintenance, property repairs, and home insurance that make owning a home more expensive than people expect.
He also explained that a mortgage can psychologically weigh on a lot of people who don’t like being in debt. Renting doesn’t have that same amount of stress. He also mentioned a story of someone who has to allocate 55% of their monthly pay toward their mortgage and has to repair a roof.
That’s a realistic scenario that can catch a lot of people off guard. If you’re in debt with other financial products, such as auto loans and credit card debt, it’s easier to remain house poor and fall behind on financial obligations.
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Mortgages have low interest rates compared to credit card debt and other unsecured loans. However, mortgages are also amortized, which means almost all of your early payments are going toward interest. You’re barely building home equity for the first 15-20 years of homeownership with your monthly mortgage payments.
You will have to make a second payment each month to make more progress with your equity and get out of your mortgage faster. The frontloading makes it more difficult to build equity, and that’s one of the reasons people end up with real losses when they sell their homes.
While you may have sold the house at a higher price than you bought it, interest makes it hard to build equity. Combine that with closing costs, phantom costs, and other expenses, and you might lose thousands of dollars on your house.
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A house is a great thing to have if you want to establish yourself in a neighborhood and start a family. You don’t have to worry about the landlord kicking you out, and your mortgage payments stay static, while rent goes up each year.
However, the losses you incur as a homeowner are impossible to ignore. Sethi isn’t against homeownership, but he encourages people to be realistic about it. Owning a home is not an investment. It’s something that will eat away at your money between the costs mentioned earlier and the opportunity cost of not being able to put the same money into an index fund.
Sethi thinks it’s wonderful for people to buy homes when they are ready, as long as they don’t view it as an investment. However, he’s against buying a house just because you don’t want to be seen as poor. Some people buy homes due to peer pressure. They want to be seen in a socially acceptable way, and for some people, that means buying a home. Sethi is against buying a home for this reason, but if it’s to start a family, and your finances are good, then he’s all on board with it.
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This article Ramit Sethi Shares Why Home Equity Is Overrated originally appeared on Benzinga.com
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