House Poor Are You?
There are some stark differences that I just wanted point out between buying and renting because knowing these differences might just help that first home buyer or someone who is strapped to their house. You see, When someone has too much of their take-home pay going towards household expenses, we call that being “House Poor”, and it can be devastating to your financial future. But Owning a home has so many benefits, I don’t want to make owning a home sound like a bad thing even though it’s a pain in the butt sometimes.
You are a renter
You are considered a “Renter” if you are paying for a place that you do not have a legal position of ownership. This would include signing a lease for an apartment or even a house (which has become more common in the past few years), paying a friend while you crash on his couch for an extended basis. You could be living in a dorm room that your parents are paying for or maybe sharing the expenses with one or two roommates.
A typical rental agreement is to pay someone else for the right to stay in their property for a pre-determined amount of time. A security deposit is usually required, often the first month’s rent has to be paid in advance, and you need to keep the place neat and clean.
Failure to make the monthly rental payment can result in eviction.
Typical housing expenses for a Renter
- *Monthly rent or lease payment
- Trash pickup
- Natural Gas
*In many cases property owners include one or more of these utility expenses in the rental payment.
You are a Home Owner
In our culture, you can be considered a “Home Owner” even if you have a mortgage. In almost any conversation you have with a friend, co-worker, even on job applications or legal documents, you can be classified as a Home Owner even though the bank holds the title and you repay them for buying the home.
A typical mortgage agreement states that the lien-holder, the mortgage company, holds the tile for the property and you must make monthly payments until it is paid off, then you own the home and no longer have to make those monthly payments.
You lose that right if you stop paying the payment and the bank forecloses on the property.
Typical housing expenses for a Home Owner:
- Monthly mortgage payment: A portion or this payment goes towards the Principle (loan balance), Mortgage Interest, and Escrow (savings account for property taxes and insurance)
- PMI: If your original loan amount when purchasing a home is greater than 80% of the value of the house, that is to say if you haven’t put down 20% as a downpayment on a house, then you will likely be charged PMI (Private Mortgage Insurance) which, on average, is about $70-$80 per month for every $100,000 borrowed.
- All utilities (water, trash pickup, natural gas, electricity, cable, internet, phone)
- Repairs: Water heaters, air conditioners, dripping faucets, leaky roof, holes in walls, aluminum siding, broken windows, etc…
- Maintenance: Lawnmowers, weed-wakers, weed killer, lawn fertilizer, snow shovels, furnace filters, the plastic window insulation stuff for winter, paint for the the nursery, paint for the same room when they are 5, and more paint when they become Tweens before they put pin-holes in all the walls when hanging posters and pictures. And finally: Anything else you usually find on a Honey-Do List.
- The unmeasurable costs: The time spent Mowing the lawn, weeding the flower garden, raking the leaves, shoveling the snow, missing work while waiting for the repair man to arrive, mowing the lawn (Yes, I said it twice because it has to be done every weekend in the spring, summer, & fall!)
The difference between Renting and Buying
The time spent on the maintenance and unexpected repairs when owning a home is almost immeasurable. Imagine the amount of free time to read, play sports, work on a small business, further your education, volunteering at a rescue ranch, or simply spending more time with your wife and kids instead of mowing the lawn or spending all day Saturday catching up on the Honey-Do list. If you were to put a price on the expenses of owning a home you will quickly find it is incredibly cheaper to rent than to own.
[pullquote]There are huge benefits of owning a home, but almost none of them are financial.[/pullquote]
The only financial benefits of a owning a home over renting come down to two things: Tax deductions and home equity. That might not be enough to qualify getting into a mortgage as a “smart financial decision”. The biggest benefits are comfort, stability, security, and personalization (remodel a room into a den or home theater and paint it any combination of colors you would like). Those are immeasurable benefits of being a home owner.
How do you know if buying is better than renting?
Weigh out the true costs of owning a home versus renting. If you can get a great deal on a place with a small mortgage then there are huge benefits to being a home owner. But you have to consider all the costs to see House Poor you will be.
I hope you have weighed out the differences and are not House Poor. And I certainly hope you are doing so well with your money that you can afford to pay someone else to mow your lawn.
Also on this episode: