Buying Home vs Renting (Part 3)
Cost of Home Ownership
Cost of Home Ownership
This debate has grown largely over the covid time frame. We justify buying a home because somewhere, there is some propaganda on how renting is wasting money and everyone needs to buy a home. “My mortgage would be less than my rent,” as I heard once. The justification is born from an emotional place or fear. But what does a home actually cost?
General Costs: Buying a home is not just about the mortgage payment compared to your rent. It’s about whether you can afford the added costs of insurance on your property and the taxes. I’ve seen people unable to afford their mortgage just because taxes were too high, driving their monthly payment up. Or lately, with home mortgage rates over 6%, many people have been priced out of buying. Money is more expensive to use now than it was a year ago.
When you are renting, life is easy. You do not have to worry about the cost of ownership that I go into below.
Before we get into your monthly mortgage payment, there are many other fees that you have to pay prior to even buying the home. I’ll simply list them below for context:
down payment, closing costs on home (starting the process, continuing the process, inspections and attorney fees), moving costs, settling costs in new home and the emotional cost of this whole process.
Your mortgage payment includes:
Principal (the money borrowed from the bank to buy the home)
Interest (how the bank makes money. This is the cost or price of borrowing money)
Taxes ( each property has taxes to be paid to the city or town)
Insurance (to protect your home from damage; lets say fire or flood)
*Private Mortgage Insurance (Not required. Only if you put less than 20% down, the bank will make you get this added insurance, in case you stop paying them. This is protection for the bank, not for you. This can add an extra $50–150 for every $100,000 you borrow. For example, if you borrow $300,000 from the bank, your payment will include $150–450 extra for PMI per month, added to your mortgage).
**Homeowners Association fees (if you purchase a condo, town house, or property connected to or part of any homeowner association. These fees are added into the overall payment and vary. Homeowners associations are a pain in the neck and can be very expensive)
,** Not applicable in all cases. They vary.
As a financial coach: I recommend that the total payment of your home (which includes principal, interest, taxes, insurance and other fees if they apply) is 25% of your take home pay. If its less great. If its 27% not a big deal. It does not have to be 25% exactly. The biggest mistake I see people make financially is buying a home they can’t afford. I have helped clients who have a home that costs them 47% of their take home pay. That’s half! And they do not understand why things are “so tight” with money. This causes added stress to your life. No one deserves that. This is what is known as “house poor.” Being house poor can lead to divorce, foreclosure on your home, lots of stress and health issues because of that stress.
Dan Roman is a Husband, Father, and writer that releases a daily blog. A quick read on money, marriage, parenting, self-improvement, development and his thoughts. Dan is also Founder/Creator of Roman Solutions, a Personal Finance Firm that currently provides coaching and education.
To connect with Dan visit: linktr.ee/bydanroman
Or by email : financialdifference@danromansolutions.com