The “rent or buy” argument is one that will always be rehashed time and time again. After all, it’s a constant issue because most people A. need somewhere to live and B. have to choose to own their own living space or simply rent it from someone else.
There are serious pros and cons to each of these options, and whether you rent or buy should be determined by your financial situation, long-term goals, and your priorities. For the sake of this post, however, let’s say you’re leaning toward home ownership.
Most folks understand the basic financial realities that are associated with buying a home. For example, instead of paying rent, owning a home means paying a monthly mortgage. You’ll also be responsible for things like upkeep and maintenance, rather than calling a landlord or property manager when something goes awry.
Your realtor may point out some properties have expenses like HOA fees associated with them that you need to pay monthly, quarterly, or annually, depending on the community. The bank you secure your mortgage with might mention stuff like closing costs. But there are additional expenses that you need to factor in to your decision on whether or not home ownership is right for you. Here’s what most real estate agents and lenders (or an online mortgage calculator, for that matter) won’t bother telling you.
What Exactly Your Mortgage Payment Consists of Every Month
Your mortgage payment isn’t just the amount of the money you borrowed divided up evenly over the 15 or 30 year period of your loan plus interest. Expect to pay the principle, interest, homeowner’s insurance, and taxes every month.
Your principle and interest will depend on the amount you borrowed from the bank when you bought your home. The larger the loan, of course, the larger the size of your monthly payment. Obvious stuff.
What might not be so obvious is that your homeowner’s insurance costs will vary depending on the kind of coverage your policy includes – and the size and location of your new home. The larger the house, the more the insurance company has to protect, and that means a larger monthly insurance payment for you. Location matters, too. How far away you are from a fire department, for example, will affect how much your insurance costs are.
Your taxes will vary, too. The more a house is worth, the higher the taxes on the property will be. Location is factor here, as well. Where we live, for example, we pay about $1,500 in property taxes per year. A house in a different region that has the same value as our home, however, may pay three or four times that amount.
You have to take way more into account than the amount of money you’re borrowing to get an accurate understanding of what your monthly costs will be. It’s way more than just a principle and interest payment, so don’t be fooled by mortgage calculators that say, “oh hey, you can afford this much house!” Well, technically I guess, but that’s assuming you’ll have certain insurance and tax obligations – and that assumption can throw these estimations way off.
Update: I love that this blog has so many smart readers! Nichole of Budget Loving Military Wife left a comment that pointed out a big omission in this post. She reminds us that “if a home buyer does not have 20% down payment, the PMI has to be factored into their monthly payment too… adding $100+” to your mortgage payment. PMI is private mortgage insurance, and will be imposed on your mortgage by the lender if you don’t put down the full 20%. This is to protect the lender in case you fail to make mortgage payments and fall into foreclosure – when you don’t have a 20% down payment, lenders consider you more risky, and therefore they require the PMI.
Home Ownership Doesn’t Mean Set Monthly Costs
When you rent, you’re subject to fluctuations in what you have to pay in order to keep renting your home. When we lived in our apartment, the cost of rent went up for us every single year. Market values and demand might cause your rent to rise and fall from year to year.
While you may think you won’t have to worry about these kinds of changes if you actually own your home, the reality is that your mortgage payment can fluctuate year to year in the same way. Your principle and interest payments won’t change (unless you choose to try and pay off your mortgage early), but your tax obligations can go up and down.
If your home gained value in the last year, you’re likely going to be paying more toward your escrow account in the following year to make sure you’ve put enough towards the next tax bill. Similarly, if you overpaid your escrow account, your monthly mortgage payment may go down. While lower monthly expenses certainly aren’t a bad thing, they can catch you off guard if your payment drops one year and rises the next – and you haven’t budgeted for that increase.
The Extent of Maintenance and Upkeep
Sure, you understand that as a homeowner, you’re responsible for replacing or fixing anything that goes wrong or stops working. But you also have the expenses associated with regularly maintaining every aspect of your home. For us, that looks a little something like this:
- Annually: Clean gutters, pressure wash exterior parts of the house (siding, deck, driveway, and front walk), service furnace and have A/C units cleaned, have home inspected for termite damage as part of warranty.
- Seasonally: Spray for bugs, treat lawn for weeds, wash exterior sides of windows, deep-clean carpets, limb up trees near the house, trim bushes, check attic to make sure nothing is making a nice cozy home up there.
- As needed: Regular cleaning inside and out, replace old weatherstripping, repaint deck, repaint trim (inside and out), fix things that break because it seems like something falls apart every month.
All that stuff costs money out of your pocket – and that’s not really an exhaustive list, just what I thought of off the top of my head. For us, most of our regular maintenance comes in the form of taking care of the exterior of our home, since it’s a single-family residence (as opposed to something like a townhouse that might have an HOA that handles a lot of the exterior upkeep – with a bigger annual fee for doing so).
And don’t forget when you have to completely replace big ticket items. Things like furnaces, attic insulation, appliances, and even the roof of the house or the flooring won’t last forever. You are fully responsible for replacing major components of your home, and these can easily run into the thousands of dollars in terms of cost.
None of this is revolutionary. It’s all pretty common-sense, but it’s so easy to forget a few expenses here, a couple costs there, when you’re trying to determine if you’re financially prepared for home ownership. Be aware of these kinds of regular, recurring maintenance and upkeep expenses and be prepared to make room for them in your budget.
Now, the Upside!
With all that being said, I feel like this was a bit of negative take on home ownership. I don’t mean to dissuade anyone from pursuing that path – these are simply the financial aspects of home ownership that I wish I had fully understood before we decided to purchase our home. I don’t regret our decision, but we were super broke the first year that we bought our house because lots of unexpected expenses popped up! The more you know, the better you’ll be able to evaluate whether or not the pros of buying outweigh those of renting.
The best common sense advice for those wondering if they can truly afford home ownership is to always overestimate what your costs will be, and underestimate the amount of money you’ll have on hand to pay those costs. Don’t expect someone like your realtor or bank to sit you down and talk about these expenses with you. Do your research, work and rework your budget, and be honest with yourself about your price range before you head out the door and get on the road to home ownership.