I feel like I hear all the time, “Well, I graduated school, I have a job, I think I am ready to buy a house.” Are you? Should you? We own our home and we have had a YEAR! A little background on our home. We bought it brand new 6.5 years ago. We were the last house completed in our neighborhood. No one has ever lived here, but us, so it is new and perfect still, right? WRONG

January: We had roof rats. Besides being totally skived out, but the fact that rats were partying above my head nightly, it is not a cheap fix. We had to get rid of the rats, then we had to seal the house where they were getting in, and sanitize. This cost thousands of dollars.

March: Someone came for our regular heating and air check. We had coil leaks, and those needed to be replaced, then while replacing those something in the heater broke. Yup, thousands of dollars.

April: Plumber came for a running toilet that took 2 seconds to fix, but I mentioned when you fill up the bathtub the sinks leak. I thought it was nothing, it wasn’t. We had pressure issues and the valves (2) that were suppose to fix it were both broken. This was only $800.

Besides venting about my horrible house year, I am telling you this because #1 issue with home ownership is surprise costs. You think you can cover the mortgage comfortably, but what about if a pipe bursts or you get termites or one of the million other issues that can happen in a home? And don’t forget, the bigger the house the more furniture you need, and that is not cheap either!

Reasons people say to buy:

1. Tax Deduction: With the new Tax Cuts and Jobs Act of 2017, most people are not itemizing. The standard deduction has doubled, so you would need more than $12,000 (single) or $24,000 (married) of itemized deductions to even use that form, so your property tax and mortgage interest would have to be pretty high to make a dent in your taxes, and then you are still paying mortgage interest and property tax. The new law also caps your Mortgage Interest & Property Tax Deductions: On new homes, you may only deduct the interest on $750,000 or less. This means if your mortgage is $1,000,000, you can only count the interest on $750,000 of it. The law caps property tax deduction at $10,000.
2. Building Equity: This is my favorite. If I am paying rent, it is just gone, I need to build equity. If you cannot put at least 10% down when you buy the home, you have to pay PMI (Private Mortgage Insurance). That money is totally thrown away and you will never see it again. Also, it takes time to build equity. It is one thing if you are sure you are not moving for 7-10 years, but if you are young and single, jobs change, situations change, maybe you want to go live in Ecuador for a year? Do you really want something holding you down here?
3. American Dream: Is this the real reason you want to buy? Because you are suppose to? I mentioned the unexpected costs above, but their is also general up keep with a home. Yard work, updates, maintenance, furniture, etc. Are you ready for that? What is the dream worth?

I know it seems like I am advocating for renting, and depending on where you are in life, I totally am. If you are right out of college, rent and figure life out. If you are married with kids and like me swear you are never moving, then buying is probably better.

The best way to look at it is by the numbers.

Cost of Renting

1. Annual Rent (Monthly x 12)
2. Renters Insurance (Usually pretty cheap)
3. Add both together and that is the cost

Cost of Owning

1. Annual Mortgage Payments (Monthly Mortgage X 12)
2. Property Taxes
3. Homeowners Insurance (maybe .5% of home annually)
4. Maintenance (maybe .8% of home annually)
5. Total COST (Add up 1-4)

Less

1. Principal reduction in loan balance (multiply interest rate x loan balance, then subtract that number by the mortgage payment to get which amount goes to principal)
2. Tax Savings due to interest deduction (this is $0 if you use the standard deduction, if your home is greater than $750,000 only get interest up to $750,000) (Interest portion of loan x tax rate)
3. Tax Savings due to property taxes (this is $0 if you use the standard deduction, or if you do use it, capped at $10,000) (Property taxes x tax rate)
4. Total Deductions (Add Up 1-3)

Annual After-Tax Cost of Home Ownership (5. (Cost sect) – 4. (Less sect)

Estimated Annual appreciation in value of home (Google your area)

Total cost of Buying (Annual After-Tax Cost minus Estimated Annual Appreciation)

Compare the Renter Cost to the Owner Cost, plus the intangible values I discussed above, and then ask yourself which makes more sense for YOU? This is a personal decision. Remember if you spend too much on your home this will effect your lifestyle, but also effect your psychological well being which is VERY closely tied to your finances. Most planning sources will tell you 25% of your budget should be allocated to Housing, but this is ALL the costs of home ownership (even surprise costs), this does not mean you buy a home where your mortgage alone is 25% of your paycheck.

The amount of your budget you allocate to home ownership or renting is personal as well. You could buy/rent well below your means and have extra money for things like travel, shopping, hobbies, whatever you like to spend on, or you can hit the top of your budget and eat Ramen and watch Netflix every night. Only you can decide what works for you.