If you’re dead set on buying a home, here’s a quiz to see if you are considering everything. Remember that housing should make up about 35% of your overall monthly budget. As such, it’s damn important to the overall success of your whole financial life.
Let’s assume you are looking at buying a $250,000 house (BTW, I used that figure for quick math, but you can easily gauge your particular numbers based off it):
- Do you have $50,000 in the bank for a down payment?
- Do you have roughly $5,000 to $10,000 for other stuff like real estate taxes and insurance?
- Are you totally cool with about a $1,500 monthly payment (assuming low interest rates)?
- Got $3,000 to $5,000 for closing costs?
- You all set with moving costs and other big expenses when you move in (furniture, renovations, appliances)?
- Are you down with maintaining all those appliances? Hiring plumbers, landscapers, exterminators, snowplowers and whomever else for work to be done on your property? Do you look in the mirror and see yourself as a superintendent? I would account for about 1% of the home value in maintenance costs per year—so got another $2,500?
- Have you shopped around the neighborhood and couldn’t find a similar house or apartment for less rent than what you’d be paying for your mortgage?
If you answered “yes” to EVERY single question and will live in your home for a few years, then you’re looking like a good candidate for buying.
Let’s go back to question 7 again. What if you found a similar house/apartment for $1,500? Same rent as the mortgage: what do you do? Rent or buy? All the psychological stuff aside, here are the strictly financial pros/cons to buying:
Money will come back to you later. Your mortgage payment includes a small amount of principal repayment, so some of that money will come back to you when you sell. When I say some, though, I mean some: don’t expect to get rich selling your house. If you rent, the money you pay every month doesn’t come back.
No big surprises. Your mortgage payment will not go up much (the real estate tax and insurance parts of your mortgage tend to rise, but the principal and interest parts of the payment are fixed, provided you have a fixed loan). If you rent, you could either get kicked out or gouged on rent later on. Renters are at the mercy of their landlords and the local real estate market. Renters can and often do get priced out of neighborhoods.
Tax savings! The interest you pay on a first mortgage is deductible up to $1 million. Yep, ONE MILLION DOLLARS. The amount you could be saving using our example could yield close to $500/month if you’re in a state with high personal income taxes and you’re in a higher income tax bracket (if you’re not, you will be! At least, think that way…). Renters usually don’t get tax love.
If anything goes wrong with the house, you pay; if you’re renting, you’re usually off the hook (unless you actually caused the damage, of course).
You’re tying up $50,000 (based on my example of a $250,000 house). That money can be put to work in a ton of other ways, namely investments, ideally making you more money than the amount you would have used as your down payment. When you rent, you don’t have to tie up or even have $50,000.
The home can lose value. At the start of 2017, for example, homes in Suffolk County, New York had declined in value by almost 5% from the year before; yep, they lost 5% of their value in just one year.
This list is for you to mull over, and the questions are yours to answer: is this the home you’re really going to want and love for the long term? You can’t change houses like you can outfits. Ask yourself: can you be happy in a rental? What’s more important to you: not having the headaches of repairs and upkeep or being totally in charge of what happens to your place? And finally, whether renting or buying, ask yourself if you’re taking on expenses you can comfortably afford. Any home that sinks you financially is a prison, no matter how nice it is.