Over the next few weeks, I’ll highlight some of the money traps that keep Americans chained to debt and unable to achieve true financial freedom. By simply avoiding these traps, you can literally save yourself hundreds of thousands of dollars over a lifetime.
Conventional wisdom suggests that home ownership is the path to wealth creation. But unless you’re careful, home ownership can turn into a money drain that saps wealth instead of builds it.
Much of the problem lies in the fact that Americans are an impatient bunch. Gone are the days of the starter home. Nowadays we want the dream home, or as close to one as we can get, right off the back.
This type of thinking forces couples to stretch their budgets to accommodate homes they really can’t afford. Too often they’re unaware of the hidden costs of home ownership. You might think that because you have a $1,400 rent payment, you can afford a $1,400 mortgage payment.
But the mortgage payment is just one part of the home ownership equation. In fact, financial experts estimate that home ownership will set the average couple back an additional 40% to 45% above their mortgage costs. If your mortgage runs $1400 a month, for instance, then expect to spend between $1960 and $2030 a month on total home ownership costs.
These expenses include utilities, maintenance, property taxes, and home owners insurance. An important point to remember, however, is that these expenses are sunk costs. They are necessary for you to keep your home, but do little to create wealth. And when you’re just starting out, these higher sunk costs can be the lead weights that take you under.
One final point to consider, – the more expensive the home, the less likely you’ll be able to come up with the 20% down payment needed to avoid private mortgage insurance (PMI). PMI is insurance you pay to protect your lender in case you default on your mortgage. In reality, it acts more like a hidden tax for those without enough money for an adequate down payment. The PMI on a $140,000 mortgage could cost the borrower an extra $110 to $120 a month!
Buying a home can be a great investment, but you must do your homework first. Most importantly, purchase a home that fits your budget. This may mean you have to purchase a lower priced starter home. But in the process, you’ll avoid the more expensive sunk costs that can sap wealth.
BMWK – Please check back over the next few weeks as we discuss additional money traps that keep Americans chained to debt.