Major Costs That People Often Overlook When Deciding Whether to Rent or Buy
When popular myths are disproved , people often throw the baby out with the bath water. Buying a home can be overdone , but that doesn’t mean it’s always a bad decision. You just need to look deeper, which means there are some costs to consider that are often overlooked.
A friend once told me that his mortgage payment was the same as his monthly rent, so buying a house was “an easy task.” The problem is that the payment did not include taxes and insurance costs over time, which can skew the numbers a little. This is not to say that he made the wrong decision; that’s not all mathematics.
Buying a home is a big decision, so don’t limit yourself to the obvious when counting the numbers. Most people think about the price of a home, the cost of rent, mortgage payments, interest rate, and possibly even higher service and utility bills. These are all important, but there are some important additional costs to consider:
- Tax and insurance . What is the total amount of your mortgage payment: principal, interest, taxes and insurance (PITI)? If you’re paying for mortgage insurance, add that too. Here’s a calculator to help you. Taxes and insurance can increase significantly over the years, so you can add that to your calculations.
- Tax breaks: Some states may offer loans to renters, but the largest tax breaks are for homeowners. This calculator will help you estimate how much you will receive.
- The Cost of Your Taxes and Insurance: What kind of long term return could you get if you invested that money instead, in a stock market, CD, or even a “high interest” savings account?
- Opportunity Cost of Your Down Payment: Same Story. What profit could you have made if you invested this lump sum instead?
- How long you live in the home : This depends on the market, but in general, the longer you live at home the better . This allows you to spread your expenses over time.
The New York Times Rent and Buy Calculator is still the best I’ve ever seen, and it calculates all of these factors and more.
It is foolish to say that buying or renting is always the best or worst decision, because the factors vary greatly depending on specific situations. Don’t think that buying is bad because it was oversold. Do the math and consider the above factors to decide which solution is best for you .