Friday, November 15, 2019 / by Shawna Calvert
When it comes to deciding whether you should buy a home or keep renting, there are lots of pros and cons for each option. For most people, making a choice isn't easy at all because the advantages of buying vs. renting (or vice versa) don't always outweigh the disadvantages. There can be much to consider such recent changes to the tax laws. For some, owning a home may not seem as attractive as it used to be. Nevertheless, renting doesn't always mean you'll be saving money either - it all depends on a number of factors such as location, how many years you're planning to stay there, extra costs associated with owning a home, and taxes. Lets explore this in more detail.
The most common argument for buying is that when renting, you're paying the landlord what you could have been paying for your own home. And that is true. When you're renting, the money you pay monthly isn't building equity and working as an investment. However, what people forget to take into account is that the true cost of homeownership is usually a lot higher than anticipated. If you're planning to stay at the property for less than five years, this cost may outweigh the benefits of buying altogether. True, the mortgage rate may be lower than your rent, but associated costs can be up to 50% of your mortgage monthly payments. Add to that the closing costs when you decide to sell, and you'll see how you may actually lose money on your investment if you're not planning to live there long-term.
Here's what you need to take into account when planning to buy a home:
- Mortgage origination fee
- · Closing costs
- · Agent/lawyer fees when selling
- · Monthly mortgage interest
- · Homeowner’s insurance (HOI)
- · Property taxes
- · Utilities
- · Mortgage insurance (if your down payment was less than 20%)
- · Maintenance & repairs
Note- Many home loans factor most of these associated homeownership costs into your monthly payment.
But how to calculate whether you should rent or buy? Actually, it's not as difficult as it looks.
Kristy Shen and Bryce Leung, who retired at age 31 as millionaires and co-authored the book, "Quit Like a Millionaire", say that you need to do some simple math following their Rule of 150. According to their book, "the extra ownership costs are approximately equal to the interest of a typical mortgage over nine years, and the interest is approximately 50% of your mortgage payment during that time, you have to multiply your monthly mortgage payment by 150%". If the number you come up with is higher than your rent, you should keep renting. But if it's lower, then it's time to buy.
Another easy way to do the math is to use a rent vs. buy calculator at Nerdwallet. This calculator can help you to figure out how many years you'd have to stay at the property for your rent and mortgage payments to break even, and when owning a home will make more financial sense than renting.
And finally, you have to take into account things like taxes, tax incentives and other payments. For some people it makes sense to buy a house, rent it out to cover all the fees and qualify for the tax benefits, and keep renting for a while.
It Doesn't Always Boil Down to Math
For many people, the question of renting or buying isn't all about math and choosing the most viable option - it's also about the quality of life and what they value most. For some, flexibility is what matters because they don't want to spend money and time on home renovations, improvements, maintaining a garden, and so on. If that's you, then renting is your way to go.
But if you're looking for certainty and stability, as well as a home to raise a family, then you should look into buying. A house in a sought-after suburb is not only a good place to live, but also a great investment. Owning a home gives you a lot more control over the property, too - you can make it truly your own and customize your space.
It is a great time to buy a home, we WANT you to experience the stability of home ownership, but the choice whether to rent or buy a home is a very personal one. Ultimately, it's down to what you can afford, what makes the most financial sense, and what arrangements work best for you and your family. The BEST place to start is having a conversation with a lender who can walk you through the pro's and con's and give you an estimate on what you can afford. This is called a "prequalification". Give us a call today, we can put you in touch with a no pressure mortgage loan expert who can help you to determine if now is the time to buy!