Owning a home is always better than renting, right? Wrong! Here are some of the most common misconceptions about owning vs. renting your home. So if you are not sure about signing off on that mortgage, here are a few reasons why you might have the right idea. These are some of the myths that I have been told repeatedly over the last few years about home ownership and renting your home and the truths that I have discovered instead.
Myth #1 – “Paying rent is just throwing your money away. A mortgage payment is an investment.”
Truth – While it is true that there are some benefits to making mortgage payments (i.e. tax breaks for interest, etc…) the bottom line is that unless you are absolutely sure that you can make those payments every month for the foreseeable future, the risk is much greater than the reward. Mortgage payments may be an investment, but they are also a responsibility. Let’s compare worst case scenarios with a leased apartment or house and a mortgage. If for whatever reason you cannot make your lease payments anymore the result is usually an eviction. This means that you will have to find a new place to live and probably make arrangements to pay the landlord the money owed for any back rent and possibly a fee for defaulting, maybe up to 2 months of rent so that they can still get payment while they are looking for a new tenant. Can this add up to quite a bit of money? Absolutely, and if it goes to court then it will be a black mark on your credit rating as well. Even so, now consider the alternative. If you have a mortgage that you default on, they are not going to be content with just one or two months of payment. They want the total balance due. The equity that you have earned in your house is not doing you any good once you cannot make the mortgage payment and those tax breaks aren’t going to cover you either. So much for your investment. This is the quickest way to bankruptcy available. Even if you don’t go bankrupt, a foreclosure on your history will make you “unlendable” not just for homes, but for almost any credit. While landlords occasionally report to credit bureaus, most do not so your rental history would only affect your credit if it went to court. Mortgages, on the other hand, report regularly and are the first thing looked at by most credit analysts.
Bottom Line – If there is any doubt in your mind that you can make the mortgage payments that you would be agreeing to (this includes possible increases for adjustable rate mortgages) then you are better off renting. Consider it a different kind of investment. Use the time that you are renting to finesse your budgeting skills and calculate what you are sure that you can afford. Set aside the amount that you want to spend for your mortgage and if it is higher than your rent each month then put that extra into savings. If you have managed to have that extra every month at the end of your lease (this means in addition to money budgeted for savings and miscellaneous expenses) then you can look into buying a house and taking on that payment. Not only will you know that you can do it, but you will have a nice little cushion that you can put towards your down payment or moving expenses.
Myth #2 – “With housing prices so low right now you can buy a house for the same or less than you can rent.”
Truth – This is a trap that many people fall into. It is easy to look at lower house prices and think that it would be cheaper to buy a house than to pay the rent on an apartment. Mortgage lending sites love to use this to draw in customers by putting monthly payment calculators on their websites that tell you that you can have a $150,000 home for less than $1000 per month. So you can have a house that you will own for approximately the same price as a 2 bedroom apartment in many areas. This seems like a no-brainer, right? WRONG! Those calculators only show a fraction of the actual costs of owning a home. First, the payments are usually calculated with a 20% or higher down payment factored in which many first time home buyers cannot afford to make. Second, many do not factor in property tax rates (which can fluctuate) and extra money for Private Mortgage Insurance and home-owner’s insurance, all of which can increase your monthly payment by almost 50%. Finally, this monthly payment does not account for maintenance and any necessary repairs which may be needed on your home. Once all the other required payments are factored in that $1,000 or less mortgage payment can quickly go up to nearly twice the amount.
Bottom Line – You should never take the word of online calculators to decide how expensive a house you can afford. Make your budget and figure out how much you can afford for housing each month. Subtract around $200/month for maintenance and emergency repairs and then take that amount and talk to some reputable Realtors and mortgage companies to see if you can get a payment below that amount, INCLUDING taxes and PMI (private mortgage insurance). Call your insurance company to see how much it would cost for home-owner’s insurance and adjust your housing budget accordingly. If the total of all these different expenses add up to more than your alloted housing budget then you cannot afford to buy the house. With a rent payment at least the amount each month is set in stone and you do not have to worry about additional maintenance or emergency repairs. Renter’s insurance is also generally very inexpensive (under $50 a month usually) when compared to home-owner’s insurance.
Myth #3 – “A home is a good investment because property will increase in value and you can sell it for a profit.”
Truth – The trouble with this myth is that it all depends on WHEN you sell your house. It is true that if you buy a house now and wait for the housing prices to go up again you can probably make a profit, however you may have to wait several years before the property value goes up enough. When you consider that the first 5 years at least of mortgage payments are paid almost directly to interest only and not the principal of the loan that means that it will take that long for you to make payments before you could sell your house even for the same price that you paid and come out even. If you are planning to stay in that house for 5-10 years this will probably not be a problem. However, if there is any chance that you might need to move within 5 years you can easily end up losing money rather than making it. This can cause real problems when you are trying to finance your home in the new location because most people count on the money from the sale of their first home to put towards the down payment of their next home.
Bottom Line – If you, or your spouse, have a high likelihood of relocating for work, you might be starting a family in the next few years and want a bigger home or you just haven’t quite decided that your current location is the right one for you then renting is probably a better option for you right now. It is much easier to pack up and leave a rented apartment, even if you have to break a lease, than it is to try to sell a house. If you have to move quickly and you are only a couple of years into your mortgage you will be lucky to break even, nevermind make a profit.
These are just a few of the reasons why owning a home is not for everyone and every situation. It is easy to listen to the constant rhetoric from friends, family and the ads on tv that tell you that owning a home is the American Dream and it is the best thing for everyone. The truth, as usual, is that nothing is the right choice for every person. Owning a home is a huge responsibility and it is not one that should be rushed into. Take the time to really do your research and find out if the timing is right for you or not. No matter what you decide, remember that it is not a house that makes a home…it is the personal touches and day to day living.