Home Ownership is Costing You Money

Photo by Elisa Ventur on Unsplash

It seems like as soon as you enter adulthood, society pressures you to rush into dramatic milestones. As if they are a limited-time offering which if you don’t act now, you’ll miss out on the opportunity in the future. One of those milestones is purchasing a home. The common belief is that you should buy a home as soon as possible instead of renting because homeownership is an asset while renting is just lost money. While it is true that homeownership is an asset, the idea of it always being better than renting is misleading. Here are five reasons it is better to rent than own a home.

1. You Move A Lot

Research shows that it typically takes at least 5 years for your home to apprieciate enough in value to make a profit on returns when selling. Unless you plan on maintaining the home as a rental property (which is also not as easy to upkeep as gurus may have led us to believe), selling your home after only owning it for a short period of time will actually cost you money.

According to the Mortgage Reports, home owners should plan on staying in a home long enough to offset transaction costs.

Image from: https://themortgagereports.com/ How long should you live in a house before selling? written by Erik J. Martin

With leases typically only lasting a twelve-month period (some even shorter), renting allows you to move at your lesiure without the hassle of owning a home.

2. No Mainentance Costs or Repair Bills

One expense that I hear is always overlooked from first time homeowners is maintenance costs. They are always shocked to find how often and how much it cost in terms of upkeeping a home. My brother has even said that it’s like owning a child that never grows up. As a homeowner you’re in charge of all, that’s right, ALL mainentance and repairs. Shoveling, yard cleaning, repairing the laundry machine are just a few obligations on the laundry list of typical responsibilities of owning a home. Whether you learn to do it yourself or pay for someone to do it is up to you; nevertheless you’ll be dishing out loads of your time or loads of money on maintenance and repairs alone. Renting on the other hand, allows you to place the burden on the landlord. All it takes is a simple email, text or phone call and your problems magically disappear (although some landlords try to avoid you at all cost when maintenance or repair is mentioned :P).

3. You Can’t Afford to Put at Least 20% Down Payment

Yes that’s right! While there are some options and exceptions in which you would be able to to put a lower-to-no down payment on a home, it is almost always going to cost you in the long run if you don’t put a reasonable down payment. In fact, many states would require private mortgage insurance (PMI) on top of your mortgage payment in order to qualify for the home. PMI is “an added insurance policy that protects the lender if you can’t pay your motgage”. While the PMI can cost less that $100/month, not put 20% + PMI can cost you thousands of dollars extra a year.

Table from: https://myhome.freddiemac.com/ The Math Behind Putting Less Than 20% Down

4. You Don’t Have to Pay Property Taxes

Property taxes vary from state to state, county to county. So much so that people literally gather all of there belongs and travel across country just to avoid hefty property taxes. Property taxes can cost homeowners thousands of dollars each year. If you dont plan accordingly, could lead you in a bunch of debt on top of the debt of owning a home.

Speaking of debt…

5. You Have Significant Amount of Debt

If you have credit card debt or a high balance of student loan debt, don’t even think about becoming a homeowner! Insurance rates on both credit cards and student loans are typically higher than the interest rate of owning a home. With the former ranging from 15–24% interest on average. When owning a home, these expenses do not magically disappear. The money you’ll use towards homeownership can go towards paying off your debt in lightening speed.

The following is how much I personally save from prioritizing paying off my student loan debt compared to owning a home.

Scenario 1 — Prioritizing Paying Off Loan vs Mortgage

Table 1:1 — This scenario is based on the following assumptions: 1) Inflation = 3% each year (affected the rent cost and the Home value cost & savings in Assets). 2) Student loan interest = 5%, (Not including the impacts of COVID-19 — ex — interest paused). 3) Down-Payment under 20% often requires mortgage insurance (PMI) that can range up to 2% of the mortgage balance. 4) Savings/Investments — assumes that any money that would’ve been paid towards student loans is invested once the balance is cleared. 5) Net-Worth does not include any external investments (such as car value, 401k, IRA, stocks, etc) which vary from person to person. 6) Mortgage is a fixed-30 year payment plan of a 300,000 home starting value. 7) Loan payment total = 1,500/month

As you can see, even with inflation and house value increasing, I save roughly $10,000/year by renting and prioritizing paying off my student loans compared to mortgage. Additionally, my net worth is over $10,000 more than homeownership by 2025 and completely debt free.

By 2025 I can use that money spent on paying off student debt and put it towards saving for a 20% down payment.

Table 1:2 — This scenario maintains same assumptions as table 1:1.

By 2027, even with the increase in inflation, I would be able to buy the same home I wanted in 2021 while also saving more than $30,000 from deciding to rent instead of rushing to own a home.

Wait a second! What if I start off saving for a 20% down payment while paying minimum on loans? Would I save more money prioritizing loans then?

Let’s See…

Scenario 2 — Prioritizing Paying off Loan vs Saving for 20% Down Payment

Table 2:1 — This scenario is based on the following assumptions: 1) Inflation = 3% each year (affected the rent cost and the Home value cost & savings in Assets). 2) Student loan interest = 5%, (Not including the impacts of COVID-19 — ex — interest paused). 3) Down-Payment under 20% often requires mortgage insurance (PMI) that can range up to 2% of the mortgage balance. 4) Savings/Investments — assumes that any money that would’ve been paid towards student loans is invested once the balance is cleared. 5) Net-Worth does not include any external investments (such as car value, 401k, IRA, stocks, etc) which vary from person to person. 6) Mortgage is a fixed-30 year payment plan of a 300,000 home starting value. 7) Loan payment total = 1,500/month. 8) You Prioritize saving for Down Payment.

While the cost of living is the same for the first 3 years, by year 4 (2024) the cost of living for prioritizing paying off debt would be nearly half of the cost of saving for a 20% Down Payment right away. Additionally, once again, I would save $10,000 if I prioritize paying off my student loans.

While everyone’s circumstances vary. The next time someone pressures you to owning a home, send them this and do the math. It might not be as wise as you think :P!