Personal finance may not have more debate than rent vs. purchase. And to someone on one side of the fence, the case may seem very simple.
Advocates say buying a home can lock rates and build capital on the property that is theoretically valued. In comparison, branching out what could be a mortgage payment in the form of monthly rent is similar to throwing away money.
This is a line that Bernadette Joy, author of “Crush Your Money Goals.” Home-built billionaires and financial coaches get pushback every time they warn homeownership for homeownership.
“My favorite thing is to challenge people and say, ‘Show me your depreciation table,'” she says. “Show us how much equity you really built.”
I’ll point out that over the first few years of your mortgage, many of your payments are headed towards interest rather than the principal. If you are on a 30-year mortgage, she says that there is little fairness for you to show it, and you may be half-ten to yourself. That’s why she usually recommends alternatives to her clients.
“If you’re buying a home, buy it on a 15-year mortgage, because at least it builds equity much faster,” she says. “If you can’t afford a 15-year mortgage, you really can’t afford a home.”
Buy a house with plenty of room
If you’re currently renting and playing around with a mortgage calculator, you may think you can own your home for something that roughly pays your rent, even if you’re considering some of the significant costs of homeownership, such as property taxes and home insurance.
But homeowners come with other hidden costs, says Joy. And being unprepared can leave you to a volatile financial situation.
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“I rarely come across a coaching client who says, ‘What do you know, let me actually mathematicize what I really can afford on a mortgage,” she says. “And what I’m finding with it is that most people buy more houses than they can actually do.”
There are a few things to consider in the calculation.
More expensive home loans
Joy prefers a 15-year mortgage because he can build equity more flexible and faster. Eventually, she begins paying off the principal on a 30-year mortgage, but the wait is long, she says.
“How likely is it that (30 years) mortgages will be seeing mortgages that go up to the bitter end without selling or refinancing (and starting the watch again)?” she wrote in a recent article in Bankrate.
Of course, shorter mortgages are offered at a more steeper price. According to Bankrate calculators, they bought a $435,300 home, bought a median price with a 20% down payment, according to the National Association of Realtors, and are considering paying around $2,500 a month on a 30-year mortgage. You cut your loan to 15 years and your bill will rise to nearly $3,400 a month.
Sizing Cost
No matter what type of mortgage you choose, a new home will be a step further than what you’re renting out, says Joy — which comes with increased costs. One would be to have more rooms to serve. And you probably don’t want to be cheaper as you own the place.
“When I’m sitting with my client, I say, let’s see the cost of equipping this house the way you want,” she says. “People don’t want to provide IKEA to their new homes. They go to West Elm.”
She says she expects to pay more with the utility as well. And if you leave your city apartment for Barb’s house, Joy recommends considering a longer commute to your budget.
Maintenance and other headaches
“You have to budget a certain amount each year for repairs, because that’s exactly what happens,” says Joy.
A recent bank rate survey shows that homeowners pay an average of $8,808 per year in maintenance costs. If you don’t have the cash to pay for a fallen tree or a new washing machine, or if you don’t have one of the other millions that could come out, you may find yourself making some tough decisions.
“What happens to a lot of my clients is they buy a house and things are good until something breaks,” she says. “Then they get caught up in credit card debt, or they have to sacrifice other parts of their lifestyle to accommodate those things.”
Please know your number
Overall, Joy recommends a 50-25-25 approach to budgeting. 50% of your income is heading towards the cost of living, 25% is heading towards the increase in your wealth, and the rest is heading towards what you enjoy.
After considering all the costs, when you buy a home, “Math is not math,” says Joy, over a 50% threshold for your cost of living.
And make sure that even if it’s within your budget, it’s sufficient for the emergency fund.
“If anyone hasn’t been able to maintain the three months’ worth of expenses inside a high-yield savings account, Joy says, “I’m not ready to buy a house.”
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