Buying vs. Renting a Home, Home Equity (Maybe) vs. Cash
As a financial counselor I have heard many, many times that clients won't consider selling their homes and instead rent an apartment or house. The most frequent response is “Renting’s like throwing my money away! Why would I do that?”
It is very ingrained in our psyche that homeownership is an American symbol of success. But in today’s economic environment, owning a home might not make much financial sense, at least for the next year or two.
It’s true that a home is an asset but it is usually accompanied by a mortgage, which is a liability. If you are going to put money into a home then your home value needs to grow at a higher rate than its costs, and the net value increase has to beat the return you could get in a savings account. Otherwise your home-as-an-investment isn’t going to produce the highest return and isn‘t the best use of your money.
Traditionally, at least over the last 20 years, home values have generally moved up. However, it has become apparent in the last 3 years that home values can also go down, and yet, people still are reluctant to rent versus buy. Your rental expense isn’t any different than your utility expense or even your grocery expense; these are basic costs of living. You and your family need a roof over your heads, warmth and food. If living costs and investments can be boiled down to math and risk, your feelings about home ownership might change.
Below are some realistic numbers based on current market offerings in the same town, comparing the cost of buying versus renting. Assume the utility costs would be approximately the same whether you buy or rent, but maintenance, lawn care and repairs would be taken care of by the landlord in the rental house. There may be an additional cost for renter’s insurance but unless you collect antique furniture or valuable artwork, the annual cost is very reasonable ($100-200 per year).
- Cherry Hill, NJ House $250,000 3BR/2Bath
- Deposit (20%) $50,000
- Mortgage $200,000
- 30 yr fixed interest @ 4.25%= $984/mo.
- R/E taxes 2010 $7,649/yr= $640/mo.
- Home Insurance $780/yr (Chubb)= $65/mo
- TOTAL COST $1689/mo (mortgage, home ins., real estate taxes)
- Additional Costs: not included (approximately $2000-3000/yr)
- Repairs, Lawn care, Home Maintenance (unknown)