Should you rent, or buy a home? Congratulations on asking yourself this question.
The answer really depends upon many other life goals. Many generations of American’s have grown up with the goal of earning their own home. Homeownership has become a common cultural dream but does it really make sense for all Americans or those outside the United States?
In this article, we want to take the emotions out of it and take a hard-luck at the numbers. Let’s look at renting a place to live versus buying. I have heard it said many times that “paying rent is throwing money out the window.” I would have to respectfully disagree, and here’s why. When you rent, you are paying for 30 days of shelter for a specified price.
When you borrow money for a home loan, you pay interest and fees on the amount borrowed. This interest paid IS throwing money out the window.
Here’s why. When mortgage rates are low, prices of homes increase because more people can afford to buy. So,
1. You may pay more than you should if you are buying a home in a seller’s market.
2. If a person buys a 3-bedroom, 2 bath home for $150,000 and finances it at 4.00% the initial outlay of interest for the year is approximately $6,000.
3. The fees associated with this home loan are approximately $3,000 upfront, which is added to the loan or paid out of pocket.
4. The next expense a homeowner must pay is property taxes. These are county and city taxes that are levied against your home annually. County taxes will run anywhere from $10.00 – $20.00 per $1,000. This doesn’t sound like much until you multiply $20 x 150 which comes to $3,000. This is an annual tax and will continue to increase.
5. Insurance. When you buy, you must purchase homeowner’s insurance to protect you and the bank against loss. Insurance prices vary between companies but in this case, we’ll say the price of insurance on a $150,000 house is going to be $800 per year.
6. Private Mortgage Insurance (PMI). When you buy a house, the bank wants to remain secured and protected against loss. PMI is an insurance that a borrower must pay if he/she has to borrow above 80% of the purchase price. This fee is added into the monthly payment and remains part of the monthly payment until the loan balance drops below 80% of the appraisal value. PMI fees can range from 55% – 2.00% of the total loan. Let’s say for easy figuring that the PMI fee on a $150,000 purchase is 1.0%. This would mean you must pay $1,500 to make sure the bank or mortgage company is covered in case you can’t pay for the house.
So, let’s add all of this up and determine how much money is being “thrown out the window” the first year after you purchase a home.
THE REAL NUMBERS AS IT RELATES TO BUYING A HOME
- Paying too much for home? We won’t even include this in the figure
- Interest cost Year One: $6,000
- Fees to close on house: $3,000
- Property Taxes $1,500 – $2,000
- Insurance $800
- PMI Insurance $1,500
- Total Cost Year One $12,800 – $13,300
So, when you break this down into a monthly figure of $12,800 / 12 you can see that the monthly amount you are throwing away is $1,066 in year one. This figure decreases in year 2 because of the fees associated with closing on the house. You will not have to pay these in year 2 therefore your monthly outlay in the second year would be approximately $817.00.
Rent costs vary from place to place, but usually coincide with housing prices. If the cost of buying a home is very expensive in your area, the price of rent will be very high as well.
So, the illustration of someone buying a 3-bedroom, 2 bath home for $150,000 would mean that the rent cost for this home would be in the $1,000 – $1,200 range. Renter’s insurance (this would protect the contents in your home) will cost about $120 per year. So, the total “out the window” when renting would be between $12,120 – $14,560 or $1,010 – $1,213 per month. Also, several other nice things about renting are that you are not responsible for repairs, which could amount to enormous expenses. You also have the freedom to move once you have satisfied the terms of your lease. Buying a house is a tremendous commitment. Yes, your goal may be to own a house in the future, and it’s a wonderful goal to have. I just want to make sure you know all the facts before you buy. I want to make sure you buy a house for the right reasons that are congruent with your life goals. Buy a home because you think you are throwing money away when your rent is not a suitable solution.
IS YOUR HOUSE AN ASSET?