I had a meltdown in my front lawn a few weeks ago. It was my inaugural attempt of the spring season to mow my yard, and of course, no matter how many times I pulled that string, I could not get that damn mower to start. So, like any 29 year-old independent and self-sufficient woman would do in that situation, I called my dad.
Scratch that. I called my mom so that I could use Facetime to show my dad what was going on. But after 10 unsuccessful minutes of me trying to walk them through getting her iPhone connected to their home Wifi, we gave up, and my dad tried to walk me through diagnosing the problem over the phone.
We checked the gas. We checked the oil. We tried to check the spark plug (tried because I don’t know what a spark plug looks like – my dad was embarrassed for me). We were 20 minutes into this conversation, my mower still wasn’t working, and car after car driving past my house was playing witness to this crazy scene. I. HAD. HAD. IT. I had a million things to do that day, the most important being mowing my godforsaken lawn because I was THAT neighbor, and the universe wasn’t even allowing me to do that. I was frustrated, and my stress level led me into a 5 minute rant about how I wished I had never bought a home in the first place.
Yes, it seemed like I had broken my lawn mower, and in turn, my lawn mower broke me. However, what the great Mower Incident of 2016 brought back to the forefront in my mind was the constant debate over which option was more financially sound: renting or buying? Those on Team Home say renters aren’t building equity. Team Rent claims the added costs of maintaining a home overpower any of those achieved by that equity gain. So who’s right?
Honesty moment: I wasn’t certain. So I decided to do that analysis on myself, looking at what it cost me to buy and maintain my home versus what it would have cost me if I had kept on renting. I not only thought this would be a good real-life case study, but it would also allow everyone thinking about buying a home to see what all does go into homeownership. Let’s dig into the numbers.
I’ll be perfectly honest, one of the main motivators behind buying my home when I did was the fact that interest rates were so low. That was a horrible reason. Don’t do that.
Don’t get me wrong, I had my financial ducks in a row, but I really didn’t have a solid reason to buy except for the fact that I was tired of apartment life. And those low interest rates. Here is what I should have considered prior to starting the entire process:
What impact will this have on my overall finances (AKA will this make me “house poor”)?
Have I outgrown the space I’m currently in?
Am I prepared to keep up with the maintenance?
Do I have enough of a down payment saved up to avoid private mortgage insurance (i.e. 20%)?
Do I want to commit myself to living in this city?
Those are legit. Low interest rates…not so much. Yet, here I sit in my house of 3 years writing this, and I can’t say I regret it. Well, I don’t regret it yet. We’ll see what the numbers say.
First up - the total cost of living in my home for 34 months:
If you didn’t know I was type A before, you do now. Yes, I realize this is a lot to take in, so let’s go through the numbers.
Mortgage - $30,700
Like I’ve said before, I received a low interest rate on my mortgage, but it still kills me to see all that money going towards interest. A knife straight to the heart. You’ll also notice insurance is a lot higher than any renter’s insurance you’ll pay. Double yikes.
BB Tip: Avoid the 30 year mortgage and go with the 15 year instead – you normally receive a lower interest rate and build equity in your home faster. I did this and saved almost $40,000 in interest (read all about it here).
Utilities - $7,600
Let’s just say my 1925 home isn’t the best-insulated on the block. My gas bill in the winter is HORRENDOUS.
BB Tip: When shopping for homes, get the average utility costs from the seller before making any offer. These can be pretty substantial, and you don’t want to buy a home you can’t afford to heat.
Start Up Costs - $25,600
This not only includes my 20% down payment (peace out, PMI) and closing costs, but EVERYTHING else involved with initially buying a home: the home inspection, pest control, furniture, a lawnmower and weed eater, a dehumidifier…you get the picture. It’s not cheap to outfit a home, folks.
BB Tip: Try to put 20% down or get there as soon as possible to get rid of private mortgage insurance (PMI). Track your loan balance using this Loan Amortization Calculator, and as soon as you hit that 20%, call your lender to ensure they remove that from your mortgage payment.
Maintenance - $8,800
I had to replace my entire HVAC unit last fall, which let me tell you, wasn’t cheap. However, I was able to pay for it without getting into more debt because of my emergency fund. It’s those unexpected moments when you are so glad you socked some money away.
BB Tip: As part of the terms of the sale, have the seller purchase a first year home warranty. If anything breaks in your home within that first year, you are responsible for a small service fee but they cover the cost of replacing or repairing anything.
Remodel - $10,800
For about 4 months, I was using a shower with little-to-no water pressure and a small desk lamp as a light fixture in my bathroom. I can only imagine how my make-up looked during that time. I went a tad over budget with my remodel, but I figured it increased my equity by at least half of what it cost. And now my makeup doesn’t look like s#!*.
BB Tip: Looking to remodel your home? Click here to see what I learned while doing mine and the things you should be thinking about before you start demoing.
Total Home Costs - $36,600
After factoring in the offsetting equity and tax gains, I calculated it has cost me $36,600 (or $1,080 per month) to own my home. For me, this falls under the maximum 30% of your income the “experts” say you should be spending for home costs, so yes, I am doing a bit of a happy dance. But we’re not done.
Rental Impact (My TRUE Home Costs) - $17,550
I have rented out rooms in my home for almost the entire time I have lived here. I know that’s not an option for everyone, which is why I wanted to show the costs of owning with and without factoring in this additional rental income. However, notice that after taking that extra money into consideration, the cost of owning my home drops by over 50%, bringing my monthly costs to $520. Holla at your girl.
BB Tip: When you rent out a portion of your home, a portion of any maintenance, repairs, or remodeling costs to the rental bedrooms or common areas can be written off on your taxes. Because of my projects, I’ve claimed a loss on my “rental property” each year, and it’s saved me almost $3,000 in taxes to date.
We know how much it cost me to own, so now it’s time to see how that compares to what it would have cost me to rent.
I’ll be honest, I left a pretty cush renting situation when I bought my house. However, I didn’t want the rent I paid there to be the baseline for this analysis as most people don’t rent from one of their best friend’s fathers (and thus, get the “friends & family” deal), so I researched an apartment in my neighborhood that I more than likely would have rented. Here are the numbers:
There you have it folks: the costs to own (without rental income) versus the costs to rent were within $10 per month of each other. And if I had split rent with a roommate over that time period (which I more than likely would have), the “real” costs of owning vs. renting would have been within $30 per month of each other. Who would’ve thought?
In the battle between renting and buying, it looks like there’s no clear winner when it comes to the financial side of the equation – owning did win out by a small margin, but not enough to make it a cut and dry decision.
However, note that we completely ignored the intangibles (positive and negative) of both options, and these can have a definite impact on your decision. Don’t want to spend half of your Saturdays doing yard work in the summer? Keep renting. Need more space for your family? It may be time to buy. I’m glad I did if only for my garage – no longer having to scrape ice off my car windshield every morning in these Indiana winters is a godsend. A GODSEND.
One note of warning, though, before you throw all caution to the wind and tell your significant other I said you can buy that upscale home in your favorite neighborhood.
The reason my numbers were so close is because before I did anything else in the home-buying process, I figured out how much I wanted to pay each month towards my mortgage. I then based the amount of home I could afford on that number. I never knew the maximum amount I could have been approved for because I never asked. I told the bank my magic number, and they approved me for that. No more, no less. If you allow the bank to determine how much home you can afford, you are essentially allowing them to run your finances. And that’s not a smart move on your part.
Alright, my PSA on mortgage affordability is over.
Oh, and for those inquiring minds who want to know: yes, I did eventually get my mower started.
Now it’s your turn to share: Why do you think buying or renting is better than the other? What intangibles did you consider when making your decision?