Monday, August 18, 2014

Rent vs. Buy: Taking a Mortgage out of the Equation

Sometimes we make the rent vs. buy decision harder than it needs to be.  We can get stuck on the question of mortgage costs, payment lengths, interest rates, and similar issues, but sometimes the question of whether to rent or buy doesn’t even have to hinge upon a mortgage at all.  Sure, a mortgage can certainly form the backbone of many of the rent vs. buy discussions; however, sometimes the debate can be solved more easily by taking this factor out of the equation.

15-year mortgage? 30-year mortgage? Does it even matter?
It might seem like a mortgage is the biggest decision in the rent vs. buy equation; and for some, it could be.  But it doesn’t always have to be.  For example, the first home we bought was almost as costly even without our mortgage as the apartment that we were renting.  Had we paid more attention to this, we might have avoided an expensive home purchase mistake without ever having to make a decision upon what sort of mortgage was best.

Regular home expenses can outpace rent
In the example of our first home, it was all the extras that really killed our budget.  We could easily have had the same or similar monthly payment (about $800) with a mortgage as we did with our regular rent, but there wasn’t much we could do about all the extras that came along with our home and that we didn’t have with our apartment. 

For example, here are some of the items for which we paid more at our home than our apartment and by how much each month:

  • Property taxes: $400/month
  • Repairs and maintenance: $200/month
  • Higher utilities: $125/month
  • Higher insurance: $25/month

At the time, we were paying $765 in rent each month.  This means that these additional amounts that we were paying to live in a home and that equated to about $750 a month more than what we’d pay for them as renters were almost as high as our rent itself before even factoring in the cost of our mortgage.

Appreciation, depreciation, inflation, and stagnation
Many people talk about a home as an investment.  They mention a home’s potential for appreciation, but seldom -- until we hit a period like the housing market collapse -- do we hear about home price depreciation or stagnation.  Of course how a home’s price changes throughout the years can be largely dependant upon location.

However, there are a few assumptions that I tend to make when considering these factors and that again, have nothing to do with a mortgage.  First off, as renters, we can pretty much assume that a landlord is going to bump up the rent a couple percentage points every couple of years to account for inflation.  I also tend to assume through our experience in the Chicagoland area, that whether or not property values are going up on a home, a municipality is likely to increase property taxes.  This increase in home carrying costs can negate that potential rise in rent.  It’s also likely that the costs of materials and/or labor to maintain a home, and things like utilities will also go up to account for inflation, while a home’s value could remain relatively stable or even decline.

Therefore, before only just considering mortgage rates, terms, lengths, and costs, consider thinking about other aspects of owning a home.  They may open your eyes to the true costs of home ownership more than a mortgage cost calculator ever could.


The author is not a licensed financial, mortgage or real estate professional.  The information provided in this article is for informational purposes only and does not constitute advice of any kind.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.

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