Military personnel writes..
I have to move every 3-4 years for work, and so does everyone else I work with (military). A LOT of coworkers buy and sell a house at each duty station, because someone told them, “Since you never see rent money again, buying a house is usually the better financial decision.” And I’m here to tell you that’s BS when you’re buying a home for a short time (less than 4 years). Just like rent, there is a lot of money going out the door when you own a home that you’ll never see again.
Traditionally, owning a home is pitched as a good investment, because you build equity in the home by paying off the mortgage principal. True statement. But consider all the rest of the money you have to shell out along the way to do that:
- Mortgage interest (this is usually the largest piece of the pie, especially early in the mortgage)
- Property taxes
- Home owner’s insurance (HOI)
- Flood insurance
- Mortgage insurance (if your downpayment was less than 20%)
- Condo or HOA fees (for those types of communities)
- Realtor/lawyer fees when selling (and sometimes buying)
- Closing costs (buying and selling)
Taking a completely arbitrary example (but using realistic numbers), let’s say you can afford a $250K home, you have $25K (10%) to put on the downpayment, with a 30-year fixed rate mortgage at 4.50%. The property tax rate in your area is 2.00%.
If you put that info into a mortgage calculator, it will say your mortgage payment is $1140/month (which includes the interest on the mortgage, plus your principal payment). “Sweet!” you say, because that’s pretty affordable for a $250K home. But wait.
- Property tax = $4500/year = $375/mo
- HOI = $87.50/mo (Source: Zillow, $35/mo per $100K of home value)
- Flood insurance = cost can vary from $0 to a LOT (over $100/mo)
- Mortgage insurance = $93.75/mo (assuming 0.5% of borrowed amount of $225K)
- Maintenance/repairs = $2500/year = $208/mo (based on 1% of home’s value to use or save toward repairs)
Now, if you total all of that up, what you get is: $1904 and change per month to own. Plus, you’re building equity in the home! All the better. But if you take a closer look at that mortgage payment of $1140, there’s something important. How much interest are you paying versus principal in that $1140?
You can’t quantify this as a set number, because it changes every month. When you make a payment, part of the principal is reduced, so the interest on the principal is less the next month. But you can average it out over set periods of time.
In this example, with your very first $1140 payment you pay $844 in interest and $296 towards equity. Over the first year, you will have made $13,680 in total mortgage payments; $10,050 of that will have been purely interest on the loan. Only $3630 will have been equity in your home. After 4 years, the numbers are $54,720 total, of which $39,170 is interest and $15,550 is equity. In that 4 year span of time, the average amount you paid in mortgage interest per month was $816 ($39,170 divided by 48 months).
So, the final analysis has to be: once I tally all the money that goes out the door when I buy, is it more or less than what I can rent (which is also money out the door)? In this example:
- 816 (average mortgage interest over 4 years) +
- 375 (taxes) +
- 87.50 (HOI) +
- 93.75 (PMI) +
- 208 (repairs fund) +
- Any “other” costs (lawyer, realtor, condo, flood insurance, etc.)
If you can rent a place that fits your needs for $1580 or less, you’re doing better renting the place than you would if you bought the $250K house in this example. You can invest/save what equity you would be building, plus you don't take on the risk of owning the home (depreciation, unforeseen costs).
TL;DR – Yes, you never see your rent money again, but there’s a ton of money when you own a home that you never see again either. You need to make sure the dead money when owning is less than the dead money when renting.