Many are under the belief that home ownership is the sure-fire way to build equity. When you buy a home, you discovered that home ownership has a lot of hidden expenses beyond just the mortgage and that home ownership can be a big mistake. In fact, there are many situations where continuing to rent makes more sense even when you have the resources to buy a home.
First of all, you’re going to want to make the choice that results in the smallest amount of your monthly income vanishing into the abyss. There are a lot of expenses when you own a home that are required to maintain and adequately protect your home and most of those bills do nothing more than maintain the home you already have.
In other words, you have to add up the total of the bills you’re paying each year in relation to your home and subtract from that the equity you build to see how much your housing is actually costing you. That number then needs to be compared to the cost of a year’s rent and rental insurance. Whichever number is lower is the option you should go with.
The expenses are numerous.
Mortgage payment. During the first half of your mortgage, the majority of your monthly payment will go to interest, while less than half will actually build equity in your home. The first few years, in particular, are mostly given over to interest. If you make a $1,000 mortgage payment and $900 is interest, you’re only building $100 equity in your home.
Homeowners insurance. This is an expense you need to have to protect against the unknown. You can reduce the cost of homeowners insurance with careful shopping, but it’s still an expense.
Property taxes. Renters are almost always shielded from this. Property taxes can vary widely, but unless you live in a very low cost area, it’s going to be in the thousands of dollars annually.
Maintenance and upkeep. A good rule of thumb here is that your home will cost 1% of your property value to maintain each year. Thus, if you have a $200,000 home, you’ll find yourself dumping $2,000 into property maintenance annually.
Increased energy costs, major appliance costs, homeowner association fees, and new utility fees (like garbage removal and sewer costs) that you might not have been paying before.
If you are making the decision to rent or buy, make up a balance sheet. Try to estimate all of the costs for each option along with the equity gained in each option, add up the expenses, subtract the earnings, and then see what option comes out on top.
Christian Science Monitor