Am I better off renting or buying a house?
This is a very old question. Before you decide, you need to answer the following:
1. How often do you expect to move in the future?
2. How stable is you employment situation?
3. How much can you afford to pay for housing?
To answer this question you need to prepare a detailed monthly household budgeting plan. As a guide, most mortgage companies will only allow your housing costs to equal 33% of your gross income. Housing costs may include your rent or mortgage payment, property taxes, utilities, and 50% of condo fees if applicable. In addition, if your total debt servicing costs (housing costs plus all of your other monthly debt payments) exceed 40% of your gross income you won't qualify for a mortgage.
As a guide, how much rent are you paying now? What is the maximum amount you are willing to pay?
4. Are you able to save money every month?
Once again, we need to take a look at your budget. As a renter, are you able to save money every month? How much do you currently have in your savings? If you buy a home its important to have some money set aside for "emergencies". You may not be able to save as much money as a homeowner as you did when you were renting, but its important that you leave some room in your budget to save something. If you have to stretch your budget to the point that there is no room for any savings, you are probably stretching your budget too far and you should definitely reconsider your home purchase.
5. Is it important to you to own your home?
6. Finally - here's the math
PAYMENT | RENTING | BUYING | |
Rent | $850.00 | -- | |
Mortgage | -- | $640.00 | |
Condo Fee | -- | $150.00 | |
Property Taxes | -- | $100 | |
Utilities | $150.00 | $150.00 | |
Total | $1000.00 | $1040.00 | |
On the surface, it looks like there's very little difference between renting and buying a house, but the model only shows half of the picture.
As a renter, you aren't responsible for maintenance, age of the home and the type of features that it has. Generally, the older the home; the higher the maintenance. A good rule of thumb is to estimate maintenance costs to be 2% of the value of the home value per year. In this example that would be $1,800 (2% of $90,000) or another $150 per month.
In addition, when you buy, there are "Closing Costs" that have to be paid. They include legal fees, land transfer taxes, and other miscellaneous expenses that you don't pay if you are renting. A good rule of thumb is to assume 5% of the purchase price on the home. In our example that would be $4,500 (5% of $90,000).
And finally, when you buy a home you need to make an initial "Down Payment". In our example we used 10% or $9,000. If you remained a renter, that $9,000 plus the $4,500 you paid in closing costs could be invested and earn income. At a conservative rate of 7% per year, the $13,500 would produce $945 per year or $78.75 per month in interest income.
On the positive side, when you buy a home, a portion of your mortgage payment goes to pay-down your mortgage, increasing the percentage of your home that you own. In our example, in the first year of home ownership your mortgage payments would total $7,680, of which about $1,000 would go towards reducing the mortgage. The rest ($6,680) represents interest – the cost of borrowing the money to buy your home.
Lets revisit our example:
PAYMENT | RENTING | BUYING | |
Rent | $850.00 | -- | |
Mortgage | -- | $640.00 | |
Condo Fee | -- | $150.00 | |
Property Taxes | -- | $100 | |
Utilities | $150.00 | $150.00 | |
Maintenance | -- | $150.00 | |
Cash outlay per month | $1,000.00 | $1,190.00 | |
Investments | ($79.00) | -- | |
Increased Equity | -- | ($83) | |
TOTAL | $921.00 | $1,107.00 | |
No comments:
Post a Comment