Welcome to one of the age-old dilemmas of the first world: is renting or buying a home better? As one of the most significant influences on your financial life, the answer to this question needs to be well thought out.
Despite the biased screenshot I used above, this really is one of the more evenly-split decisions that I like to discuss.
To frame this properly, we first need to take a look at the question we are trying to answer:
Which one is better – renting or buying a home?
The issue is, the answer to this question is not absolute; in other words, this really isn’t the right question we need to be asking. A MUCH better version of the question that steers us closer to the correct solution is:
Which one is better for me and my goals – renting or buying a home?
Don’t get me wrong, this is not one of those everybody-is-right or truth-is-subjective situations (will vent about this in a future post), but when it comes to your housing situation, the “right” answer really does come down to how you aim to build your life, financially and otherwise (side note: if in your twenties, please jump over to this post on financial goals for your 20’s and make sure you have these items started as well).
So today, I’d simply like to highlight a few of the points that typically slip through the cracks of conversation when this subject comes up (in a later post I will get into the preceding decision of societal expectations and whether the school-college-job-marriage-home-kids-retirement path is something we choose or something that chooses us).
First in line, we come to……………..you guessed it……………
1 – MORTGAGE
Now, you may be thinking to yourself, “Hmmmm, duh. Chris, this is obvious”. And you are right, this is obvious. Which is why I am still shocked that so many people do not think (or talk) more about the underbelly of this word that has almost become a caption underneath the American Dream.
Have you ever looked at this word and consciously (or sub-consciously) focused on the “MORT” part of the word? Does it remind you of something? Something, say, deathly? Welp, you, once again, are correct; because the derivation of the word “mortgage” is “mort”(dead/death) + “gage” (pledge). When put together, you get “mortgage” = “death pledge”.
This may sound a little harsh, and I don’t intend to be a Debbie Downer, but I do want you to see the facts with 20/20 vision.
As you can likely infer, this gloomy-sounding noun doesn’t mean that nobody should ever use it, but rather
the word “mortgage” emphasizes the the fact that this is a lifetime-level decision.
This point is obvious as the overwhelming majority of mortgages are 30-year loans (with some 15-year loans sprinkled in there every now and then). What is less obvious, however, is how much you end up paying over the course of 30 years for this loan.
You see, compound interest (which Einstein dubbed as the 8th wonder of the world) is perhaps the most overlooked x-factor in history. This financial piece of dynamite, when stuck between the crevice of time and dollar input, can explode either in your favor or the favor of your lender. When it comes to a mortgage, the most important factor I can highlight for you is that
a 30-year mortgage at current interest rates (3.9%-4.9%) costs you almost DOUBLE the total loan amount (if you only pay the required amount each month)
To put some numbers around that, if you buy a home for $125,000 (putting 20%, or $25,000, down; a non-negotiable for smart yopro’s) and receive a 30-year mortgage of $100,000 at a 4.0% fixed* annual interest rate, if you only pay the required monthly amount (a little over $1,000), then, at the end of 30 years, you will have paid $171,868 to use $100,000 for your home!!!!!!!!
(*a fixed-rate loan is another non-negotiable; the other option, an adjustable rate loan, is much trickier if you are not careful and was a huge part of the cause of the 2008 global financial crisis)
I’ll let that sink in for a minute.
Now, there are a few tricks that we can use to pay off our mortgage early to actually reduce the overall amount of interest we pay on the loan, but I will have to get into those in a separate post. What I really want you to remember here is the main idea that you will pay almost double the amount of your original loan in order to buy a home. So, think twice about this and put an early-payoff plan together (using this online mortgage calculator) before even reaching out to a realtor. After all, who wants to be mortgaged up to their shins for 30 years, the prime cut of your immeasurably valuable and brief time on this earth?!
Next, for a much more brief point, I want to come back to the other side of the “but if I rent I am just throwing money away” conversation, and shed some light on the
2 – COST OF HOME OWNERSHIP
Having lived on both sides of the renting vs. buying fence, I must admit that one of the objectively best benefits of renting is that the responsibility of maintenance, repairs, and replacements falls on the owner! (this benefit quickly flips a head once you become the owner).
Find a leak under the sink? Call the owner to fix it.
Refrigerator stops working? The owner has to buy a new one.
Air conditioning stops in the middle of some sweltering summer heat? Time to bill the owner.
When you are on the renting side of the equation, this benefit doesn’t seem all that great. But, just going off anecdotal experience, from the time my wife and I bought our home in 2016 until now, we have repaired or replaced the dishwasher ($600), oven ($150), floor leak ($100), garbage disposal ($400), water heater ($200), A/C ($100), and perhaps one or two more minor jobs that I do not recall right now.
Needless to say, for a home that was only 12 years old when we moved in, the once taken-for-granted cost of ownership while renting quickly turned a head as a pronounced nuisance (but fun, learning-opportunity giver).
Now that I’ve run out of space and time, I will take a break for now and pick this conversation back up later or in the comments.
Have any favorite tips or thoughts on renting vs. buying? Let me know in the comments below.