If you’re thinking about buying a home, one of the first things you should consider is how long you’re going to stay in the area. If you’re pretty sure that you’re going to be moving elsewhere within five years, you’re better off renting.
Why is that? There are several reasons.
First, the first five years of the mortgage are the worst years for building equity. The vast majority of each of your payments during the early years of your mortgage is going to go straight towards interest. On a thirty year mortgage, you build approximately 5% of your home’s value in equity during the first five years of the mortgage.
Second, much of that small amount that you do build in equity will be eaten by realtors when you sell. You can try the “for sale by owner” route to try to recoup some of that value, but there are challenges and expenses involved with going that route as well.
Third, what equity isn’t devoured by the realtors will be devoured by the bank. Closing costs are not your friend. They can add up to a noteworthy portion of your mortgage, particularly when you’re really only concerned about the small amount of equity you’d build during that time.
Finally, the housing market isn’t the giant money rocket that it was seven or eight years ago. At best, home prices are stable. In many areas, they’re still drifting downward. You’re not going to make a mint by buying a house, waiting a year, and then flipping it. If you’re reading any personal finance advice that suggests doing so, check when that advice was written. I’m willing to bet it was in 2008 or before.
All of those reasons add up to a simple fact: unless you’re literally writing a check for your home, you shouldn’t buy one unless you plan on being there for quite a few years.
But isn’t renting a rip-off? After all, you’re not building equity when you rent, right?
As I noted above, you’re not building any equity if you take out a mortgage to buy a house and then sell it in the first years of that mortgage. In fact, you run a serious risk of losing value over that period.
In addition, home ownership comes with a lot of expenses that are covered for you when renting. In many rental situations, some utilities are covered. Rental insurance is almost always far lower than homeowners insurance. When home repairs are needed, you simply call up the landlord instead of doing it yourself or hiring an expensive repairman. All of these factors keep money in your pocket where it belongs.
Beyond that, when compared to mortgage payments, monthly rent is often quite comparable. This varies a lot depending on the area you’re talking about, of course. In some areas, rent will be drastically lower. In others, it’s pretty comparable. Rarely will you find an area where rent is substantially higher than mortgage payments on an equivalent living space, but there are situations like that.
If you’re considering buying, think about your future. Where are you going to be in five years? If your plan is pointing you to another place, strongly consider renting rather than buying. You’ll be money ahead.
This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.