3 bad reasons to buy a home

Before being taken in by all the 'now's the time to buy' chatter, keep in mind that there's a flip side to the conventional wisdom about homebuying.

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By Liz Pulliam Weston
MSN Money
You've probably heard that there's never been a better time to be a first-time homebuyer.

In many ways, that's true. That's because:

An $8,000 tax credit is available for anyone who buys a home this year, before Dec. 1, and hasn't owned a house in the past three years. Unlike the 2008 tax credit, this one doesn't have to be repaid -- and you can get the money even if you don't owe taxes.
Interest rates are astoundingly low. Cheap loans mean you can buy more house, if you want. The payment on a $200,000 mortgage at 6% was around $1,200, for example. For the same payment, you now can swing a $228,000 mortgage at 4.8%.
Houses are on sale. Home prices in the 30 largest markets are down 30% on average from their 2006 peaks, according to the S&P/Case-Shiller Home Price Indices.

Does that mean you should rush out and buy this year? Not necessarily. If any of these reasons are your primary motivator for buying a home, you should think twice.

'It's a good investment'
The first time I wrote a version of this column, in 2002, I heard from a lot of people who honestly didn't believe real-estate prices could ever fall.

The next time I revised the column, a few years later, I heard from people who were not only convinced that real estate could only go up but that real estate guaranteed a far better return than any other investment.

Of course, everybody has learned otherwise.

But aren't we near a bottom? Might this not be the ideal time to get in and see some serious appreciation?

Maybe, maybe not. Just because prices have dropped a lot doesn't mean they can't go lower.

The pace of decline does seem to have slowed. But the foreclosure crisis isn't over, and prices won't recover as long as banks keep dumping houses with fire-sale prices on vulnerable markets.

Furthermore, double-digit-percentage returns on home prices were an anomaly. Before the real-estate bubble, average home price appreciation barely outpaced inflation. (By contrast, in every 30-year period since 1928, the stock market's average annual return has beaten inflation by at least 4 percentage points and typically by 7.)

Homeownership can help you build wealth over time. Paying down your mortgage is a kind of forced savings, and price appreciation (when it returns) will help you build equity. But you can't count on home values snapping back anytime soon, so anyone who buys these days should be prepared to stay put for a good long while.

'I'm tired of throwing away money on rent'
Renting usually is cheaper than owning. In really expensive cities, such as New York and San Francisco, renting is so much cheaper that it's tough to make the case for becoming a homeowner. Buying in these markets often means settling for a much worse property or an awful commute, compared with what you can afford if you continue to rent.

You're not really throwing money away when you send a check to your landlord, anyway. You're exchanging it for a place to live. You're also getting flexibility and freedom -- things you sacrifice when you buy a home.

When you're a renter, it's the landlord, not you, who is generally responsible for maintenance, repairs and fixing the toilet that blows up in the middle of the night. If the neighborhood should start to slide or you get or lose a job, you can up and move, often with just a few weeks' notice.

It's true that you may have to deal with rising rents and recalcitrant landlords. Homeowners, however, are often stuck with rising taxes and maintenance costs, as well as recalcitrant neighbors.

Moving is never fun, but moving when you own a home is an expensive, time-consuming process in the best of times. Finding a buyer can take months. Selling costs will eat up about 10% of your home's value, once you add agent commissions and moving expenses. If you're already "underwater" on your mortgage -- owing more than the house is worth, as 20% of U.S. homeowners do these days -- you may wind up with a short sale or foreclosure on your record, which will trash your credit.

In other words, homeownership is more like marriage; renting is more like living together. Make sure you're ready to be wedded to a house before you propose to leave behind life as a renter.

'I need the tax deduction'
The $8,000 tax credit is nice, I'll grant you that. But that's a one-time deal, and it won't offset the extra costs of owning a home.

Neither will the tax deduction, if you even get one. That's because your write-off is limited by your tax bracket. If you're in the top federal tax bracket, every dollar you pay in mortgage interest saves you only 35 cents in taxes. Most people get even less because they're in the 25% tax bracket or lower.

In other words, buying a house just for the mortgage break would be like giving somebody a buck just to get 35 cents or less in return.

And not every homeowner gets a tax deduction. Homes in many parts of the country aren't expensive enough for the interest deduction on the mortgage to be larger than the standard deduction taxpayers otherwise get. If you can't itemize, you don't get the break.

Also, the amount of interest you pay typically declines over the life of the loan. So even if you get a write-off at the beginning of your mortgage, you may keep it for only a few years.

In any case, many of the real costs of owning a home aren't deductible. Uncle Sam won't give you a break for insurance, repairs or maintenance, for example, and those costs can really add up.

Most homeowners should plan to spend at least 1% of their home's purchase price each year on maintenance and repairs, finance expert Eric Tyson says, and more if they plan to hire someone else to do all the work. Tyson, a co-author of "Home Buying for Dummies," recommends setting aside some money each month in an emergency fund. You may not spend the whole amount every year, but sooner or later a big expense will come along -- a new furnace or roof, for instance -- that will consume several years' worth of savings.

If you fail to maintain your home properly, you'll pay even more when it comes time to sell. Many buyers won't even bid on a property that shows significant neglect. Even in hot markets, buyers are likely to ask for expensive concessions to pay for the repairs you should have been doing all along.

My advice on whether to buy a home is exactly the same as it was the last two times I wrote this column. And that is: Buy a home when the timing is right for you, when you can swing all the costs and when you plan to stay put awhile. That way you can ride out any downturns in the market and benefit from any appreciation while enjoying a nice and affordable home in the meantime.Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

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