Like millions of other Americans, I am a homeowner with a mortgage and a family. I work to support my family and pay my mortgage. In fact, my two biggest expenses are in maintaining my home (mortgage, utilities, maintenance, etc.) and childcare for my three kids (preschool, babysitters, activities, etc.). With all these expenses, I’m starting to wonder if this kind of traditional lifestyle is worth the sacrifice.
Everybody has a different financial situation. To decide if you should own a house or not, get a sheet of paper. It’s time to do some basic math.
Draw a line down the center of the paper. Label the left side “own,” label the other side “rent.”
On the “own” side, estimate these things:
- How much down payment you need to buy the home you need
- Estimated monthly mortgage payment
- Estimated monthly property taxes
- Estimated monthly tax savings (you can deduct mortgage interest from taxable income)
- Estimated monthly utility and maintenance costs (including lawn care, renovation budgets, home security, and replacement costs)
- Estimated insurance costs
Notice I did not take into account appreciation of the home value or the equity you built from your down payment and mortgage payments. Those are “sunk costs,” meaning you can’t use that money unless you sell your home.
On the “rent” side, estimate these:
- Estimated monthly rent for the home you need
- Estimated utility costs
Now, compare your monthly costs on each side. Do you see a clear winner? Maybe, or maybe not. In fact, the monthly costs might be almost the same.
But there’s a significant factor to consider that many people miss. Remember those “sunk costs”? If you had the down payment and equity amounts on hand in cash, could you invest it somehow and make money? If the answer is “yes,” subtract the monthly returns from the “rent” side.
For most people who can make money from investments, this makes renting a home much more attractive than buying.
It is generally a bad financial decision to borrow money to buy something. If you have to borrow money to buy something, it is a big red flag telling you that you can’t afford it. Why should a house be any different? If you have to borrow money (mortgage) to buy a house, that means you can’t afford it.
Save your money and learn to invest it wisely. Rent until you can buy a house outright without taking a mortgage.