Do you remember the time when it was considered wise to keep buying bigger and better houses? With your first home purchase, you most likely started small since that’s all you could afford at the time. After two or three years you started to build a little equity in your house (probably because the value was increasing). By selling this house, you were able to put a much larger down-payment on the second house, which was much more extravagant of course. After that, you moved on to a third and fourth house, each time buying bigger and better. Sure, you had $40,000 of equity in your home now, but instead of owing the bank $80,000, you now owed them $280,000!
Then, as we all know, the housing market went to crap and many people owed more to the bank than their house was worth. This method of “house hopping” was only thought to be wise because at the time, we had only known the value of houses to go up, not down.
So with the market growing again, is it still wise to house hop? My vote is no, and here are my five reasons why:
1) Pay Less Interest
When you first buy a house and start paying down the mortgage, the majority of your payment goes to the interest payments, and only a small portion pays down your principle. In other words, after a year or two, the amount you owe on your house is still very close to what you initially borrowed. If you keep hopping from house to house, your loan starts all over and 99% of your money has no impact on paying down your mortgage.
But, if you say in your house, the ratio begins to shift. After a few years you’ll begin to notice that your loan is decreasing faster and faster since more of your money is going toward the principle. By staying in your original home, your money will have a greater impact on your overall net worth.
2) Avoid the Unknowns
You know when you decide that you need another car? Many of us begin to explore the used car market and might find something that we absolutely love and at a price we can afford! However, we know absolutely nothing about this car. Sure, the owner claims that it was his grandma’s car and she only drove it to church on Sundays, but maybe it was his car and he raced it against his buddies every weekend. There are many unknowns in these purchases and no matter how much we inspect this car, it may still turn out to be a lemon.
Well the same is true with houses, only to a greater extend. With a car, you can at least get a quick idea of its condition. You can walk around it and look at the body, check the oil, rev it up and listen for knocks or clanking. With a house, many of these things are hidden. We can’t physically see that cracked foundation or the mold that’s lurking behind the wall. If you stay in your same house, at least you have a solid understanding of the issues and challenges that may exist.
3) Realize Your Improvements
It seems like there are always house projects doesn’t it? There are always things you can do to keep your house looking nice, and then there are projects that might improve it. For those of you that are into sustainability, you might be interested in solar power or wind generated power. If you truly want to realize the improvements that you make, it would be wise if you stick around for a while. At this moment, solar panels have about an eight year payback period, and wind (depending on where you live) might not pay you back until 10 years down the road. Stay in your house and experience those benefits down the road!
Being a money guy, I’m don’t often consider the value of relationships, but now that I live in a neighborhood, I realize how important neighbors can be. Certainly if you have kids that have friends nearby, it’s an excellent reason to stay in your house for a longer stint.
5) Increased Cash Flow
Some of you can’t possibly fathom this, but you will pay off your house someday (hopefully soon rather than later). By staying where you are, the chances are greater that you’ll be able to pay it off sooner. And, think about the cash flow that you’ll have once it’s paid off. If you have an extra $200 a month right now while paying your mortgage and you dump that $1,000 payment, all of the sudden you’ll have $1,200 to do whatever you want with! That is much more satisfying to me than getting a mansion on the ocean.
Are you working to pay off your home or are you a house hopper?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.