I know I’m not alone in having a TON of schoolwork right now with Spring semester ending. With that in mind, AverageJoe has been kind enough to guest post for me today while I do some much needed catching up! If you’d like to join him in coming to my rescue, leave a comment here or on the Guest Post page accessible via the tabs at the top of the page. THANK YOU, AVERAGEJOE!
AverageJoe was a financial advisor for 16 years before selling his practice to write guest posts while FemmeFrugality sits with her feet up (do you really buy that she’s working on school projects?). He writes about topics he thinks are interesting or funny at Average Joe’s Money Blog, and is the co-host of the laid back financial podcast The Worst of the Free Financial Advisor.
Ah, the American Dream….owning a home.
If this really is the American dream, than I’m about to suggest an un-American sacrilegious thought:
Do you want to “stop throwing money away” like many in the real estate industry suggest? Then think about renting a house instead of buying.
A recent East Carolina University study suggests that the gap between renters and home owners isn’t as large as many think, and the perceived value of owning a home isn’t the “slam dunk” financial choice your friends who sell real estate would have us believe.
Why not? …let us count the ways:
Building Equity vs Rent
The concept of building equity in a home, especially in the short run, is overplayed by many “experts”. Unless you’re going to pay cash for the house, the overall outflow of money you’ll spend buying a house might not be worth the “investment” you receive for your trouble.
Let’s start with something called an amortization table. When you buy a home and have a mortgage, you don’t have whatever rate the bank sells you unless you pay on time every month for the life of the loan. If you pay more quickly, you’ll actually have a lower rate. If you refinance, you may have had a much higher rate on the loan.
Amortization tables are engineered so lenders receive their interest more quickly on the loan. If you ask a home owner, the vast majority of early loan payments go toward interest and very little toward paying down your mortgage.
If you only plan to stay in a “starter home” for a few years, you’ll pay most of your money in interest to a bank. What’s the difference between this and renting? Are you actually “building equity?” Marginally. The bad news is that homeowners also have other costs that renters don’t have to worry about.
Homeowners Get Socked With Other Costs and Fees
If you’re a renter, you pay the landlord each month and maybe the electric bill. When I rented a home for several years, I also had to pay the water bill.
Here’s what my landlord handled:
Taxes – We lived in a very nice town (Birmingham, Michigan) so our young children would go to a good school.
From the City of Birmingham website: A Principal Residence with a taxable value of $187,250 would have a $7,259.38 July 2011 tax bill and December 2011 tax bill of $1,150.76.
Assuming the home we lived in was assessed at $187,250 (the house we lived in was later sold for $350,000, so that number may be accurate or low), our landlord had additional costs of $8,410.14. That’s over $700 per month! My rent was $1,000 per month. I hope Bob (my landlord) didn’t have a mortgage on the property.
Upkeep – Our yard was decent. We’d plant a few flowers because we had pride in the place we lived. We cut the grass, but I certainly didn’t worry about landscaping for the long-term or caring for the lawn like a homeowner would. Our furnace check each year and the time the dishwasher and garbage disposal broke down? Those were our landlord’s issue, not ours.
Insurance – While I was responsible for my own renter’s insurance coverage, I didn’t have to worry about the much higher homeowner’s cost. Bob paid that bill.
Association Fees – We didn’t have any in our neighborhood, but as a renter, I wasn’t paying them. Bob was going to eat that cost as well unless he had an agreement with me ahead of time.
Renting Can Save You Money
Before running out and buying a new home because you’re “throwing money away” renting, add up what the true cost of home ownership will be. I think you’ll be surprised that in many cases, renting wins the day. Owning a home has advantages, but being frugal isn’t necessarily one of them.
For those of you who are still determined to buy your first home, I found this article that might of interest to you: The 14 Metro Areas Where Owning a Home Won’t Bust Your Budget.