I am SO sick and tired of people saying:
I don’t want to keep renting and keep throwing my money away, so I’m going to buy a house.
(Of course, these folks NEVER EVER have the proper 20% down payment, it’s always 0% and they don’t realize they need to pay the mandatory mortgage insurance, but goddamnit, they need that house so they can stop throwing their money away on rent, and put it into repairs and interest instead.)
..or people telling me that:
Oh as a young person, you should really consider buying a home right away!
You’re throwing your money away on rent. Buying a home is a guaranteed investment that is the best way to save money for retirement!!
(And here I thought making money and not spending it, was the best way to save money, but I digress.)
It is not that they are 100% wrong (they are partly right in some circumstances), but they are usually missing the whole picture if they haven’t considered all the other factors that go into buying a house versus renting.
Here are all of the calculations I’ve done over the years, in one neat post…
1) This is a long post. Settle in. 3000 words is no joke.
2) Obviously, this is my own opinion, because I do not own or want to own a home.
Everyone’s circumstances will be different, but I decided to go with an average from my observations from watching TV, talking to people, reading blogs, etc…
So If you own a home and love it (and can afford it), by all means, ignore me.
Otherwise, if you’re always running your trap and can’t understand why people like me continue to rent, then read on!!!
YOU ONLY THINK THAT YOU’RE WASTING MONEY BECAUSE YOU SEE IT THE BILL EACH MONTH
You pay rent each month.
You see it as money flying out of your pocket to go into someone else’s, whereas if you pay your mortgage each month, you get a nice sense of building equity with each payment you make.
(Fun fact: Did you know that the origins were 2 words? mort + gage in French means die + pledge; talk about literal translations)
Never mind that your mortgage payment could actually be double your rent (or more!), and that part of it is interest and not just the principal, you still have a psychological sense that each month you’re paying yourself (and the bank of course, the ever-silent partner).
It makes the whole mortgage-paying thing easier to swallow than rent.
BUT WAIT….DON’T FORGET THAT YOU DON’T OWN THE HOUSE YET!
The funny thing is that since the bank is your silent partner, you may also forget that if you haven’t paid every single penny of that loan off to your silent partner, consistently and on time, the bank has the right to foreclose on you — or otherwise, take every single penny you’ve paid, by taking the house that you’ve been paying into.
What’s that? Foreclosure kind of sounds like you basically paid all that money to yourself for nothing if you let that happen? Well that’s exactly it.
You don’t own your house until your mortgage is cleared. The bank does.
You are paying for the privilege of living in there and for the prospect that you will eventually own it at the end of the mortgage.
So is it really any better than rent, in that respect, before all 30-years (or however long you took the loan) of your mortgage paying days are over?
You could have rented for 30-years, at perhaps half the price (or less, as we will discover), and invested the other half to have had better returns on the stock market.
CLOSING COSTS, REALTOR COSTS, & HOME INSPECTIONS
No one ever remembers closing costs and related fees. IT COSTS MONEY TO BUY A HOME.
It costs money to pay realtors to handle all of that because they sure aren’t working for free!
As for renting, unless you’re in NYC, you don’t get slammed with any kind of fee for getting an apartment.
They’re rather greedy in NYC because they can be (apartments are hard to find).
Closing costs are on average 1.5% the value of your home.
RENT = RENTING SERVICES
I am very happy to pay rent, so long as I deem it reasonable.
Renting an apartment (or a hotel room) for me, means I am not only renting the space, but also the services of the building which include building maintenance, garbage disposal and clearing the sidewalks.
I’d also like to point out that all-inclusive utilities are also available in some apartments. Gotta love it. I can’t think of any homeowner bragging of the same perk.
Even if I pay for my own utilities, I am paying a lot less than in a home, if I didn’t rent a home of course.
In my case, since I stay at a hotel and pay about $1000 for the privilege (my half), I also get the maid weekly (not that I really use her services), TV, local home phone, utilities, a pool, gym, parking, and a 24/hour concierge included.
Yes, I pay more than if I just rented an apartment, but in Canada we only have 1-year leases and I move too much to be locked down in a single dwelling. A hotel is easier for now.
Let’s say it’s $100 a month for utilities in an apartment. In my parent’s house, they pay about $450 in utilities (gas, water, electricity, heat), as well as for garbage disposable services by the city.
They take out their own garbage, clear their own sidewalks and have to still maintain their home.
RENTER’S INSURANCE VERSUS HOME INSURANCE
We pay $20 a month for renter’s insurance because I’m not taking any fancy, frou-frou package. I just want something simple and basic.
Oh, and that $20 a month is really $10/month for me, because I split all household costs 50/50 with BF.
Home insurance is on average $70 a month:
DON’T FORGET MORTGAGE INSURANCE IF YOU DIDN’T SAVE 20%
And if you didn’t fork over 20% for your down payment, you have another lovely mortgage insurance:
- 15% to under 20% of a down payment has an insurance premium of 1.75%
- 10% to under 15% of a down payment has an insurance premium of 2%
- 5% to under 10% of a down payment has an insurance premium of 2.75%
Let’s say most people save 10% (in reality, I’ve seen 0% plenty of times), and have to pay 2%.
That’s 2% of your home’s value paid until you go past the 20% threshold.
HOUSE TAXES = 1.5% ON YOUR HOME
You thought I almost forgot this property tax didn’t you?
It’s about 1.5% on average (it varies and is less than that by province in Canada, but let’s just pick a reasonable number).
This will be a tax for the entire time you own a place.
RENTING CAN ALLOW YOU TO GET INTO PLACES OTHERWISE OFF LIMITS FINANCIALLY
Want to live somewhere fancy? Can’t afford to pay $5 million for a home? Rent near there.
Maybe the location is just great — right downtown, close to a highway, or just plain safe and beautiful.
Whatever it is, renting can get you there, or at least, close to that neighbourhood.
NOW LET’S TALK HOME MAINTENANCE AT 3%
Still not done with the costs.
Maintenance on the home as a rule of thumb (my thumb), is 3% of your home’s value socked away into a little fund, and dipped into as need be when your roof starts to leak unexpectedly, or you need to replace your water heater.
If you’ll remember what I mentioned above, renting an apartment takes care of that. If there’s a problem, you don’t take care of it — the landlord does.
So if you own a $300,000 home, that means you need to put away $9000 a year net, or $750 a month for emergencies.
MORTGAGE INTEREST RATES ARE LOW NOW, BUT IT WILL NOT STAY THAT WAY
Know how the housing crisis partly happened?
People took homes at 0% down payment, on super low interest rates, and bit off far more house than they could chew.
When interest rates went up, so did their mortgage, and their disposable income plummeted.
Since they were already on the edge of busting their budget in the first place, everything imploded when they couldn’t afford to put another $100 – $200 towards their mortgage each month.
The interest on your mortgage might not bankrupt you now, but it isn’t likely to stay nice and low for the next 30 years you are paying that debt.
People have purchased homes at low interest rates, thinking they can handle the mortgage payment only to be royally SCREWED when the interest rates start to rise, and they could no longer make it.
AFTER ALL THAT, LET’S NOT FORGET FURNITURE AND RENOVATIONS!
Every. Homeowner. Wants. To. Renovate.
My brother bought a huge mansion, everything was beautiful inside.
The first thing they did?
Rip out the kitchen and put in new cabinets because she hated the colour white on the cabinets.
$30,000 later, the cabinets are a deep dark grey, with matching granite counter tops.
Inevitably, you will want to renovate.
You’ll want to buy furniture, paint the walls, change the curtains, put in an in-ground pool for $70,000 (same brother), and do all these things HGTV (Home and Garden Television) tempts and coaxes you into doing.
You start hiring designers to plan your living room for $20,000 (same brother), and a $10,000 couch later (still the same brother), you wonder where your entire emergency fund went.
In a place that you rent, you aren’t too concerned about ripping out the kitchen and putting in a new one.
You’re more into painting the walls and doing minor changes, which aren’t going to bust your budget.
Or if you’re like me, you don’t give a damn, and you don’t bother even buying paint for walls that are.. well, walls.
RENOVATIONS ARE ALSO NOT SUPPOSED TO JUST BE COSMETIC
Oh and don’t even come crying to me that you thought all there was to do was change the colour of the cabinets!
Silly rabbit…. renovations to really raise the value of your home, is not just ripping out a kitchen and changing the tiles. You also need to make sure you renovate the foundation of the house.
Redo the roof, check the walls, maybe bring in an inspector to check to see that you don’t need to redo the brickwork.
Mark my words, if the housing market falls next, it’ll be because of all these so-called “renovations” to the house that add value, which are really just cosmetic in nature rather than making sure the foundations are still solid and maintained to last.
Well when people renovate their home, they have the option of taking out an equity loan against their house to pay for all that (yikes, MORE DEBT)… or perhaps they have their home re-assessed after all is said and done, and the value has gone up $30,000 because the kitchen is just so much cooler on the outside.
(Did I mention that property taxes will rise if your home goes up in value? It’s a percentage of your home’s value..)
Some people might decide to take out THAT newly found “equity” of $30,000 from renovating, and decide to spend it on something else (a fancy vacation maybe, or just a better way of living).
Then as they truck along their lives, they realize they can’t exactly pay back that original loan they took out to fix their home, and/or their fancy vacation loan… and there you have it, repeated thousands of times across a country almost all at once.
Ba-boom! Crash. Foreclosures all over.
I may be a bit pessimistic about the whole thing, but it’s surely something that you can’t miss, watching HGTV and seeing them rip apart those homes like tissue paper, or seeing how shoddily they’re made to allow mold to grow in the walls from a lack of proper insulation or care.
RENTING VERSUS HOME OWNERSHIP
Let’s put it all together in a nice big chart, shall we?
Click to biggify
Note: Difference per year is really “difference for the first year”
Now let’s talk about the cost of the actual home, otherwise known as the mortgage payment.
We’ve only been going over the fees and insurance so far.
PUTTING IT ALL TOGETHER….
Mortgage interest rates are currently at 4.11% interest on average in Canada (2011, December, averaged the numbers here.)
Let’s say you score an interest rate for 5 years at 3.49%, and you have 25 years left to go on your mortgage.
You will be be paying around $1211 in addition to those amounts of $1225 a month above, for a total of $2436 per month for a house.
Also, assuming you followed the rule where a home is 35% of your personal finance budget, you’re making at least $83,520 a year net which is about $120,000 gross a year as an income in Ontario to pay for all of the above, “comfortably”.
I entered a few of the numbers above for a $300,000 home, with $290,000 on a mortgage and a $10,000 down payment, with an interest rate of 3.49% (the lowest right now) without changing at all for the next 30 years:
Total interest expense: $178,217.77
..which works out to about 61% of your original home’s value.
If we also consider that during those 30 years you are spending $250 a month for maintenance on your home (if you’re lucky, could cost more), that’s $90,000 (flat calculation) on top.
Interest Expense + Home Maintenance Expenses:
$178,217.77 + $90,000 = $268,217.77
..which works out to about 92% of your original home’s value.
For drama’s sake, let’s say you’ve pretty much repaid 100% of your home’s original cost in interest/home maintenance payments alone over 30 years.
That’s just now.
Now imagine that interest rates go up past 3.49% after your locked-in 5 year rate, and it goes to 4.11%, or higher.
You’ll be paying more in interest, and it could even exceed 100% in total costs.
The only good thing I can think of, is taking a 30-year loan and making serious payments against the principal, while allowing yourself the flexibility of 30-years to pay it down. Make your 30-year loan a 10-year loan at the end.
Want more things to think about that prevent me from buying a house?
Coming right up!!!!!
1) YOU MAY GET A BETTER JOB AND END UP MOVING
This happens to me a lot, but perhaps you buy a home and realize you want to live somewhere else because an amazing opportunity came up.
Enter MORE fees to sell your home, list it, clean it constantly, stage it, and then
negotiate hassle the buyers for another $5000 more.
Of course, this doesn’t happen all the time, but it could.
2) YOU MAY EVEN GO OVER YOUR “LIMIT” BECAUSE YOU FELL IN LOVE WITH A HOME
Almost everyone goes in with a budget, and then falls in love with a home and doesn’t care if they spend $20,000 more over what they originally wanted to.
What’s $20,000 in the grand scheme of $300,000 debt!?!?
Only 6.7% more than you can afford, that’s what.
Don’t fall in love with a home. It’s a home. There are plenty of others out there to choose from.
An idiot I knew, paid full price for a home, sight unseen because he fell in love with the photos.
(Yes, you are all rolling your eyes right now and dropping your jaws)
$350,000 later, the housing market crashed, and even now, his place is only worth $200,000, but he still owes over $300,000 to the bank.
No one falls in love with a rented apartment quite enough to pay an additional $20,000 more than they originally budgeted.
3) YOUR HOUSE MAY ALSO DROP IN VALUE OVER TIME
Bought it for $300,000? It may be worth a lot less now.
This isn’t the case with my parent’s house, but there’s no guarantee your city will tank (Detroit, anyone?) and housing values will plummet.
You can’t guarantee a home will always go up in value.
4) YOUR HOME WILL BE YOUR PHYSICAL EQUITY FOR RETIREMENT
You buy a home in your 30s. You pay it off by the time you’re 65 and retired.
You now only have to pay utilities and maintenance.
Don’t celebrate just yet.
You should ALSO be saving money aside in a retirement plan because your “retirement” money in your home stays there, unless you take out a reverse mortgage (then the bank gets it back in their greedy little paws again, even after you’ve paid 200% for that home).
You won’t really be able to use the equity in your home to pay for food when you retire.
Whereas if you saved your money and rented the whole time, you’d have enough cash that has been generating interest over the 30+ years, and you can probably buy a home outright without the hassle and the headaches.
That’s is my real long-term retirement plan.
I’m going to save my money by NOT buying a home, and when I go to retire, buy a small, reasonably-priced place in some less-expensive part of France, and get all the benefits without having the headaches or the interest rate payments for 30 years.
YOU SHOULD ONLY BUY A HOME IF YOU CAN AFFORD IT AND HAVE A PLAN
The bottom line is your money is your money.
If you really want a place (like everyone else in my family), then buy one if you can afford it, especially after getting through this massive post with all the home ownership fees I could think of.
So unless you’re like Nelson who is almost done paying off his home before getting a girlfriend OR turning 30, then you should probably wait until you have more in the bank.
Just go in with your eyes wide open and stop listening to people around you pressure you into buying something you CANNOT AFFORD just because the baby needs it, you’re married, or all the other things they’ll say to pressure you into doing so.
A house is quite possibly THE biggest purchase you’ll ever make if you pull the trigger, and you shouldn’t rush into it without knowing what it’ll cost you.
Don’t get a place just because you don’t want to “throw your money away on rent”, or “give away your money to someone else”. That’s just stupid.