Buy a Home Using Government Advice?

By Steve Gillman

If you plan to buy a home, and you are doing research online, you might stumble across any one of several government websites which are intended to help you. Be careful if you do; they often have bad advice and outdated information. The following are some examples, based on a visit to a HUD site in early 2012.

Outdated Information

To start with, the Hud web site visited had a section called "Shop for a loan." It presumably is meant to help you navigate the tricky waters of home finance, but the third link provided was "Learn about interest only loans." That part went on to tell you about negative amortization loans and other products that probably don't even exist any longer. The lesson? Be aware that the information on these government websites may not be updated frequently. This is made even clearer when you see the default interest rate for home mortgage loans in the "rent or buy calculator," which was 7% at a time when virtually all 30-year loans are closer to half of that rate.

Rent or Buy a Home?

If you go to the "rent or buy calculator" provided on the site, you get to plug in various figures like your current rent and the price of the home you are considering buying, to see if you'll be better off with the rental or your own house. That's the theory anyhow. Immediately the whole process is suspect given that you have to guess at what rate home values will go up. I'm sure that buyers were guessing 10% and more annually in 2006, just as prices started their 40% decline. Perhaps they would have been better off renting?

Apart from the questionable guesses you have to make to even use the calculator, there are other problems with it. For example, although it includes the cost of taxes and home owner's insurance, the designers apparently felt that maintenance and repair costs of a house were too small to be relevant. It makes you wonder if they have ever been home owners themselves. Or is it simply that the government wants to slant the information to encourage home ownership? The latter seems likely.

I entered a ten-year expected holding period, a 4.5% interest rate on a 30-year mortgage, and a 10% down payment. I entered $750 for current rent and $150,000 for the purchase price of the home. The results showed that I would supposedly be $57,000 further ahead after ten years if I bought instead of renting. Of course this did not include any costs of repairs or maintenance, as mentioned, and I suspect it did not include rising tax and insurance rates either. The calculator probably does not show the full selling costs, but who knows? They do not go into detail about how the calculations are done.

Then I noticed an interesting result. The figure for "Average Monthly Payment Over Time" showed $853 monthly for rent, which was due to a built-in assumption about rental rates rising over time. But the figure for buying was $353 per month. That made no sense at all. A fixed-rate 30-year mortgage loan of $135,000 would have payments of $684.03 every month. Correct that little error and you take away almost $40,000 of the supposed $57,000 benefit of owning.

Even if they were trying to include interest costs only it would be far more than $353 per month. Just a glitch in the system? Who knows? But it does help convince people that buying is a better deal than renting, which is probably an important government goal at the moment.

Can You Afford to Buy a Home?

The handy calculator for determining whether you can afford to buy a house starts with the assumption that you are married with two dependents. You fill in the other information. I entered an income of $50,000 to see what the helpful government officials say I can afford. The calculator didn't allow me to adjust the interest rate, which they had set at 6.25% for a conventional mortgage loan, even though the rates at the time were hovering below 4.5%. I guess nobody has updated the calculator for a few years.

The result was that I could afford a home of around $190,000 if I put 20 down. Of course if the interest rate was adjusted to actual rates it would have said I could buy a home for much more. I looked at the payment I could supposedly afford, which was $1,375 per month. Using that figure and a 4.5% interest rate, the government assumes I can afford a home for over $260,000. The calculator showed a total housing cost of $1,795 out of a total take-home income of $3,848 per month.

Now, you can disagree if you like , but I personally believe that buying a home which eats up 46.6% of your income is just plain irresponsible for most people. Jobs are lost, income drops, and unexpected things happen. I would never feel comfortable with more than 30% of my income going to housing unless there was no alternative. Once again it seems that there is an agenda here. It may be a good idea to buy a home, but be careful about the advice you get, especially from government websites.

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