Rent vs. Buy: Part 2 of 5

Part 1 | Part 2 | Part 3 | Part 4 | Part 5 is working through a series on the American Dream. In our last post, we tackled the perceived definition of the ideal lifestyle in the U.S., challenging preconceived notions. To quickly sum it up, many Americans don’t know that they’ll be able to afford a house because of the short- and long-term financial implications that ownership carries. For many, renting is more ideal for their lifestyle.

Let’s delve deeper into one aspect of the rent vs. buy debate: short-term financial considerations. In the here and now, what does owning a home or renting do to your daily expenditures? The comparison of the two housing options is more complex than some think. While contrasting mortgage payments and rent contribute, the financial picture is bigger than that.

To help you get a better idea of the immediate impact of renting or buying, let’s take a look at the costs incurred by each in turn:

Homeownership Costs

Owning a home comes with numerous costs, all of which factor into your monthly budget. The more you have to spend on your living space, the less you’ll get to put in savings (which is a long-term factor) and in flex (which is an immediate factor). These are the big-ticket items that come with a home:

Mortgage: Your home’s mortgage is sort of the equivalent to rent. This is the one sum you send monthly to maintain ownership of your place. Estimating your mortgage takes some detective work. You’ll need to know the house’s value, your loan amount, your interest rate, your credit score and your location. Such items are included on many online mortgage calculators. Do your research before using an online calculator to ensure you get the most accurate estimate.

Property taxes: This is something you don’t have in an apartment. Counties, municipalities and school districts all impact the amount you pay in taxes. Think of it as the amenities you’ll get for living in a certain area. Unfortunately, they come with a cost.

Certain areas of the country have high tax rates (such as 2 percent of the cost of your home) while others are low (a fraction of a percent of housing costs). You should factor in taxes to your monthly budget to get a better picture of what owning a  home will cost you month to month.

Insurance: Homeowners’ insurance protects you from emergencies, such as a flood, fire or burglary. You can purchase a variety of packages that cover certain items. Many lenders require borrowers to get insurance, which isn’t a bad thing—if you’re TV is stolen, you want to get a new one without dumping a bunch of money. However, you’ll be paying for the service.

Utilities: You might be wondering why utilities are included in the rent vs. buy decision, as both options have this cost. However, homeowners will pay more because they have more space to accommodate. For instance, a big home requires a powerful air conditioning or heating unit to cool and warm it. Talk to potential neighbors to get a good idea of what monthly utilities will cost you.

You probably considered such major costs already, but homeownership comes with a few smaller, unexpected ones.

Repairs and Maintenance: When you live in an apartment, your landlord or maintenance professional handles repair work, often without additional cost to you. However, that’s not the case with homeownership. If your water heater breaks, you’ll need a new one.

Experts recommend budgeting one percent of your home’s purchase price to go toward repairs and maintenance. Though you may be tempted to label these costs as long term, you may be surprised to see how often they occur.

Supplemental Insurance: Basic insurance doesn’t cover everything, so you may opt to purchase additional coverage. For instance, if you live in California, earthquake coverage could be important. Some homeowners even pay Private Mortgage Insurance if their down payment was less than 20 percent of the cost of the house. The PMI covers the lender in the event you can’t pay your mortgage.

Home Improvement: When you first look at a house, you might imagine installing new cabinets, upgrading light fixtures or adding hardwood floors. These improvements don’t always come cheap, but they can impact your satisfaction with your home. The new kitchen you want could decrease your flex spending, so be prepared.

Decorating: In the same vein, furnishing your home carries a price tag. You’ll have to decorate your apartment too, but a home is likely larger, requiring more pieces.

Association Fees: If you live in an association, you probably have access to additional amenities, like a community swimming pool or lawn care services. These things aren’t free.

Rental Costs

Homeownership has quite a list of fees, but rental is more streamlined. Here are the (fewer) short-term costs of renting:

Rent: Compared to a mortgage, figuring out rent is easy peasy! The landlord will tell you exactly what you’ll pay every month.

Utilities: Some cities offer free water, but not all. Figure out what utilities you’ll have to pay outside of your rent, then ask neighbors what they owe each month. This will help you plan a budget.

Renters’ Insurance: Not all landlords require tenants to pay renters’ insurance, but you should find out before signing a lease. Renters’ insurance is incredible affordable, so you should get it anyway.

In addition to basic fees, you may also pay for this when renting:

Decorating: Your space will likely be smaller than a home, so furnishing will be cheaper.

As a renter, you won’t pay for maintenance, as your landlord likely hires a person to do such work. Additionally, you can’t really upgrade a rental space, so buying new appliances or installing dimmer switches won’t even be a consideration.

The American Dream is about living a life that complements you. Paying less money in the short term may allow you more freedom to travel or go out. Add up the costs of renting and homeownership to get a good idea of where the two options leave you financially. Then, read about the long-term implications in the rent vs. buy debate.

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