Conventional wisdom says that you should stop renting and buy a home. After all, renting is just throwing money down the drain. But is that really true? When you look at some of the other costs that come with owning a home, it quickly becomes evident that home ownership has a bunch of hidden costs.
The Money Down the Drain Myth
For years, financial gurus, wealth management experts, professors, parents, and peers have all regurgitated the same lazy metaphor that renting is no better than crumpling up money each month and stuffing it down a drain. And at first, it makes sense. After all, you’re not building any equity or acquiring any tangible asset in return for your monthly payment. Yet while this is true, you can’t view renting in isolation. You have to compare it to the alternative: buying a house. And when looked at through this lens, there’s more to the story.
As a renter, you’re only responsible for writing a monthly rent check and putting it in the mail. If the garbage disposal starts making weird noises, you call the landlord and he takes care of it. If the AC unit breaks down four times in one summer, it doesn’t cost you a dime. When the lawn needs to be mowed, you can sit inside and watch a professional landscaper cut the grass without being a penny poorer.
See, when you rent, you don’t have to absorb the surprise costs that come with owning a home. So while your rent payment may not be creating equity, your decision to rent is saving you in terms of avoiding additional costs that you’d have to take on if you owned the home.
Another argument people make in favor of home ownership is that a mortgage provides “forced savings.” In other words, because you’re required to pay a certain amount of principal each month, you’re automatically building equity. Again, there is some validity to this, but it’s not entirely true. A loan can potentially cost tens of thousands of dollars in interest by the time it’s paid off. So unless you find a really good interest rate with solid terms, your forced savings will be neutralized by these costs.
The Add-On Costs of Home Ownership
Most people eventually do want to own a home, but you don’t want to rush the process. Before becoming a homeowner, make sure you’re aware of some of these “add-on” costs:
Mortgage interest. Do you know how much interest a buyer pays on a conventional 30-year-term $200,000 loan at a 4 percent rate? Believe it or not, the homeowner will end up spending more than $143,000! In other words, the $200,000 house actually costs $343,000.
Upkeep. The upkeep on a house – particularly an older house – can be really expensive in the long run. From landscaping and painting to replacing windows and fixing systems that need to be repaired, you can expect to spend a few thousand dollars every year on upkeep alone.
HOA fees. If you live in a neighborhood with a pool, playground, clubhouse, streetlights, or sidewalks, expect to pay a monthly fee to a homeowner’s association (HOA). This can range from a few dollars each month to thousands each year.
Property taxes. The government wants its fair share and taxes property owners. While this can be deducted on taxes, it’s still not cheap – especially in nice areas.
Home insurance. No lender will let someone buy a house without the protection of home insurance. Expect to pay at least $1,000 per year.
If you’re doing the math in your head, you realize just how much all of these extra costs amount to. Can you make a monthly mortgage payment and cover these expenses? It’s something to carefully consider.
Buying a Home You Can Afford
This article isn’t a knock on home ownership. Rather, it’s intended to make people aware of the reality of owning a home. Instead of rushing into a purchase decision, you should feel the freedom to patiently wait for the right opportunity. No matter what anyone else tells you, your money isn’t being thrown down a drain. There are benefits to renting – just as there are perks to buying. Be patient where you are and only buy when you’re financially and emotionally ready to do so.
Read also: Smart Tips On Maintaining House Exterior
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