- Owning a home gives you great peace of mind, but it comes with a lot more responsibility than renting.
- Budget 1 percent of your home’s value each year for routine maintenance.
- Using a rent versus buy calculator is a good start, but it won’t account for the emotional satisfaction (or stress) of being a homeowner.
Remember getting your first driver’s license? You were so thrilled to be a legal driver that you weren’t thinking about the car payments, insurance or maintenance that your parents were paying behind the scenes. It was just gas and go. Remember how things changed when you actually bought your first car? It’s a similar dynamic when you start looking at renting versus buying a place to live on your own.
Rent is pretty simple. You can basically walk away as soon as you finish up your lease. Hopefully you get your security deposit back, but renting gives you lots of flexibility. Of course, leases tend to be short-term and owning a home gives you a lot more peace of mind. You can stay as long as you like, but you have a lot more responsibility and commitment. Here are six key factors of home ownership that I want to talk you through today:
- Down payment. If you are able to make a down payment of at least 20 percent, you won’t need private mortgage insurance (PMI), which typically tacks on 0.25 percent to 0.50 percent of the outstanding amount of the mortgage.
- Principal, Interest, Taxes, and Insurance (PITI). Principal and interest is what you pay on a mortgage, say a 30 year amortized mortgage. You also pay real estate (i.e., property) taxes and you have to have homeowners insurance to protect yourself in case your home is flooded or burns down.
- Maintenance. Budget one dollar per square foot per year or 1 percent of the value of your home for annual maintenance.
- Homeowners association. If you buy a condo or a town home, you’re going to pay some kind of fee on an ongoing basis to your homeowners association.
- Length of stay. If you’re not planning to own the property for more than one to three years, then renting is usually better than buying. The longer you own the home, the more time you have to spread out your costs, and the value of the home generally increases over time.
- Opportunity cost of your down payment. It’s great that you saved enough to make a hefty down payment, but what else could you have done with that money? Could you have invested it in the stock market and earned a greater return than you made on your home’s appreciation, for instance?
The video above walks you through some examples, and you can experiment with this rent versus buy calculator from The New York Times. Again, these kinds of calculators can’t account for the emotional satisfaction of owning a home, but they’re a great financial yardstick.
Until next time, enjoy. Gary