Buy or Rent?
For those non-homeowner’s out there, how many times have you heard the phrase, “Buy a house. You are wasting money on rent.”? I heard it constantly after I graduated college. Was I wasting money? In my opinion, the answer is no. I paid someone each month to put a roof over my head. I don’t consider that a waste of money. Also, I knew exactly how much my home cost was going to be each year. It didn’t cost me extra if the water heater went out or a tree knocked over my fence. However, many people will say that it is always better to buy a home. Let’s take a closer look at buying vs. renting.
In the long run, buying a house will always be a better decision. A house is an asset that will increase in value over time. A $200,000 house could be worth $300,000 by the time the mortgage is paid off. Another reason is that a portion of each mortgage payment is increasing your net worth by reducing your debt. Rent payments do not add value to your net worth. Also, owning a home means that nobody can kick you out of your house when your lease expires.
So that’s that! Right? No. Not everyone should go out and buy a house right now. Here are some things to consider before buying a home.
1) Down Payment and Savings – Do you have enough to put a 20% down payment and still have some savings left over if the A/C breaks? 20% down is important so that you can avoid being forced to pay for private mortgage insurance (PMI). PMI can cost you over $100 a month and is generally a waste of money. I would also encourage you to have some savings left over after the down payment in case of emergencies. There won’t be a landlord to come repair the roof if it starts leaking in your bedroom.
2) How long will you live here? – The general rule is that you don’t want to move within 5 years of buying a home. This is because there are costs associated with buying and selling a home. Don’t force yourself to buy a house if you don’t think you will be living there for a while. If you are the type of person who doesn’t want to stay in one place for a long time, don’t buy a house. That’s okay!
3) You love the house – Too many people get house fever. They decide that they want a house and feel the need to buy one right when they start looking. You never know what can happen that causes you to stay in the house longer than you expect so make sure that you love it before you decide to make an offer.
4) Can you afford the mortgage? – Be reasonable. Buy a house where the mortgage payment doesn’t make the rest of your finances tight each month. A good rule of thumb is not to let your mortgage be more than 25% of your take home pay (after taxes and other payroll deductions). You can always buy a bigger house if you get a big promotion in a couple years.
Go buy a house if you read that and still feel that you are financially and mentally ready to be a homeowner. Being a homeowner changes your life. A home is a much bigger responsibility than just making your mortgage payment. However, if you’re ready, home ownership will help you build wealth over the long term. If you aren’t ready to buy a house yet, don’t let someone make you feel guilty for renting! It’s not going to prevent you from financial success.
Mike Zeiter, CPA/PFS