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Should you rent, or buy a home? 

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.  
Home ownership 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 begin paying 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 be paying 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 up front, which is either 
added to the loan or paid out of pocket. 

#4) The next expense a homeowner must pay are property taxes.  These are county and city taxes 
that are levied against your home annually.  County taxes will generally 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 over time. 

#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 are having to 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

  1. Paying too much for home?   We won’t even include this in the figure
  2. Interest cost Year One:                  $6,000
  3. Fees to close on house:                 $3,000
  4. Property Taxes                                  $1,500 – $2,000
  5. Insurance                                                 800
  6. PMI Insurance                                   $1,500

                           Total Cost Year One                      $12,800 – $13,300

 

 

 

 

So, when you break this down into a monthly figure $12,800 / 12 you can see that the monthly 
amount that 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 you 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
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 in the range of $12,120 - $14,560 or $1,010 - $1,213 per 
month. 

Also, several other nice things about renting is that you are not responsible for repairs, 
which could amount to big expenses.  You also have the freedom to move once you have satisfied 
the terms on your lease.  Buying a house is a huge commitment. 

Yes, your goal may be to own a house in the future, and it’s a very good 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 
good solution.

IS YOUR HOUSE AN ASSET?