Someone asked me about the aftermath of buying a home.
I was wondering if you plan to do a buy vs rent review/analysis now that it’s been a while that you became a home owner and you can see the different perspectives of both of them, I myself am still reluctant to become a home owner.
It’s a great question and here goes.
FEW THINGS FIRST…
You know I have to do this right?
FYI: I paid cash for my place
The place alone, cost $579,000 and my half was $289,500, not including closing costs, notary fees, other costs, and so on. My reasons of why I paid in cash, are here.
This means I have no mortgage, so I have done the following calculations at the end with and without one.
Where I bought is not where you are thinking of buying
All that means is that in some cities, it costs a million to buy a shack that is a fixer-upper, when in another city, a million will get you the biggest house in the entire city.
A million is not a million.
Closing costs, fees, and other such things based on the real estate laws also vary from place to place, so what I pay in taxes is not what you’ll end up paying.
Renting has many great benefits too
Don’t like your area, neighbours, home? MOVE.
Don’t like your landlord? MOVE.
Found a cheaper place closer to your work? MOVE.
Want to split up with your partner? No probs. Divvy up the goods and LEAVE.
If you own a house.. hoo boy.. forget it. You need to go through so many hoops, it is ridiculous. You can’t just up and leave, it is like being married to a physical asset.
Buying a home is a personal thing
Like style and everything else.
Could I recommend, point blank that EVERYONE buy a home and stop being a renter?
NO. HUGE BIG RESOUNDING NO.
What I can say is that if you want to buy a home, a good rule of thumb is to buy a home… for you. For your life. For your peace of mind.
Do not buy a place to “get in before the prices go cray-cray”, or because “mortgage rates will never be this low again!” because you will cry when you buy a place and the prices drop, or whatever.
Do not buy a place as an investment. Houses are terrible, TERRIBLE investments. You are far better off putting it in the stock market, following my easy investing strategy that only takes me 4 hours of maintenance a year.
Or worse, you want a home because because you’re having a baby and are feeling pressured that babies need SO MUCH SPACE — this is insanity talking because babies are very, very small, cannot go shopping without their parents, and while they do require things like strollers and beds and so on, you can also.. do.. without.. those… things.
- How much space do you really need?
- The Minimalist Toy Box
- Baby Bun’s Toys and Things
- Minimalism is a mindset
Do not even think about saying or thinking these words:
“The Baby made me do it. He/she wanted a house.”
OMFG. It is like holding a lit match to my dry, crackling tinder, and I will go off on you.
You buy a place, because YOU WANT THE SPACE, and YOU WANT A HOME, not because the baby wants it.
The baby only wants you. And food. And diaper changes.
So don’t use the baby as an excuse to strap a huge mortgage to your back, or take on something you really can’t afford “for the good of the baby”.
OKAY, TIME FOR THE CALCULATIONS
Let’s pretend, you are me back again, analyzing things.
BUYING WITH A MORTGAGE VERSUS RENTING
I am using round numbers so it looks better, and not bothering with compounding interest. Just straight flat calculations.
Let’s do my situation with my home costing me a cool $580,000.
If I took a mortgage, and I wanted to put a down payment down to get said mortgage, I’d do at least 20% down. It is a HEFTY CHUNK OF CHANGE, but it means you won’t pay an extra fee for mortgage insurance on top of your mortgage, and it also means you can doooooo it.
Basically, what that 20% tells me, is you are able to save money, and you are disciplined enough to meet those payments every month if you were able to sock away the sick amount of $115,000 as a down payment in one fell swoop.
Since this leaves you with a mortgage of $465,000, the principal over 30 years, will cost you about $15,500 (meaning you will pay off the actual balance of $465,000 in 30 years), but don’t forget that mortgages are debts, so you are paying an ADDITIONAL $13,950 a year in interest on that loan.
And that’s at 3% which is historically, super, freakin’ low. Most mortgage rates are anywhere from 7% – 11% on average and 3%?
That’s something that is never going to last for 30 years. If it does, I’m a (sucker) fish and I should have consulted my magic 8 ball and have taken a mortgage instead.
So if we now look at renting versus buying with a mortgage, it looks pretty grim.
You’re paying the principal, and the interest every year on this home.
Compared to renting, you’re paying about 65.4% more each year, versus if you were renting the same place instead.
Those “fees” in there, by the way, that includes my condo fees and housing taxes for the whole year…..
But wait, there’s more!
You also have other housing-related costs associated with all of this such as buying new furniture, appliances, fixing up things here and there… it cost us about $20,000 over 2 years.
All in all, pretty grim stats if you are taking a mortgage.
“Whoa, but I’m buying a home not a condo, so this doesn’t apply to me, amirite?”
Yes and no.
No, it doesn’t apply to you, my condo fees of about $800 a month, but what does apply to you are your housing taxes, and the fact that you DO need to set aside some money each year to maintain your house.
Water heaters don’t last forever.
Roofs get holes over time and need to be redone.
The driveway needs to be re-paved.
You have landscaping to consider.
Gutters to clean and fix, and goodness knows what else.
My friend bought a house with her husband (the baby made them do it of course *eyeroll*), and she is up to her ears in renovations right now, pushing $30,000 just for the first year alone.
They’re redoing every-freaking-thing.
The rule of thumb with a house, is to set aside 3% of your home’s cost per year in an Emergency Home Fund, so you are not caught off guard when your washer breaks, or your water heater goes and no one is willing to rough it like in the good ol’ days.
How about buying without a mortgage?
Ahhh.. this is my situation. I remember doing the math once and realizing that if we had purchased our place with a mortgage, we would have paid the home twice over.
Meaning, if we bought it for $579,000 you can safely assume that it will cost you another $579,000 in interest just to clear that mortgage.
So… this is why we bought in cash (and because we’re debt-averse).
My fees are cut in half, and yes in the first year, I did have a $20,000 one-time cost of appliances, renovations, notary costs, etc.
My recurring fees however, are sweet at less than half of what I was paying in rent.
If we look at my savings over the next 5 – 30 years, even if I am taking into account condo fees, having to pay for taxes and so on, I am just racking up the savings as time goes on, but only because I bought it in cash without a mortgage.
Wait. HOLD UP. Are you saying to NEVER buy a place unless it’s in cash?
Umm… no. And yes.
No in the sense that it depends on where you live. If it is a reasonably priced area, and it is actually cheaper to buy a place than to rent, even taking into account all I am briefly touching on above (notary costs, house maintenance, housing taxes), then go for it.
Yes, if you are thinking of taking on a massive, ridiculous, painful mortgage just for the sake of being able to (shakily) smile and call this place your own.
You may one day, wake up and think: Oh.. this house and its costs are like a noose around my neck. I can’t do this.
Don’t be that person.
Go in with both eyes open, and do the math WITH YOUR NUMBERS and YOUR situation and YOUR income, and YOUR lifestyle.
Do not take anyone’s advice blindly. What works for them may not work for you.