Everyone is talking about how now is a great time to buy a home. And, on the surface, it looks like the perfect time. Home prices are low, and mortgage interest rates remain at near-record lows. There is some argument, though, that it might be better to buy a home in six months; without the home buyer tax credit to help keep home prices higher, some argue that another dip in prices is likely. However, whether you are really ready to buy a home has little to do with what is happening in the housing market; more important is what is happening in your personal finance world.
When many people start thinking about purchasing a home, they usually get excited about figuring out how big a house they can get, and use online mortgage calculators to help them estimate monthly payments at a specific interest. What many of these calculators don’t include, though, are additional costs. We often forget that homes need to be maintained — by the owner. Other costs come into play as well, from property taxes to insurance to upkeep. Additionally, when many people move, they do so into a larger place. This often requires that you spend more in utilities, and you may have additional expenses, such as buying furniture, yard maintenance, and more.
The following infographic from CreditLoan.com offers a sobering look at how much it can cost to own a home. It also compares renting to buying, and your costs in each case (click here for a larger image):
You can experiment with your own set of numbers at New York Times.
There are a number of financial experts that recommend you plan to live in your home for five to seven years if you buy. This infographic backs that up by showing that it takes five years for a home purchase to be “worth it.” It also brings up the point that sometimes it isn’t always better to buy. Especially right now, there are plenty of folks (many of them real estate agents) urging you to buy because a home is a “great investment.” There is debate over whether or not a home purchased as your residence is truly an investment, and in many cases, by the time you add up the costs and interest, you are unlikely to get it all back, even with tax advantages and if your home increases in value.
Before you run out, willy-nilly, to buy a home just because it is such a good deal, it is a good idea to carefully consider the costs. You want to be able to afford your home, since it is a Major Financial Commitment. If you are thinking about “upgrading”, you need to factor in potential losses from selling your home in this market. My husband and I have just decided not to buy a new place, even though we have found some screaming deals, because the time, hassle and loss involved in selling this home are so great.
Finally, consider other options before you buy a home. You might be able to take the difference in cost between buying and renting and invest more every month. There are those who maintain that they don’t mind renting the same home or apartment for years. They don’t have to take care of maintenance, and they can invest the savings and end up with more in the long run.
Update: Wisdom from our readers
Many of our astute readers have pointed out that all of the factors are not present on this infographic. So we’d like to take a moment to point out that, as you might expect, whether buying or renting makes more sense for you depends on a number of individual factors, including your local housing market. Here are some of the other points that readers have made about what is missing from the infographic:
- Tax deduction: This infographic didn’t figure in the fact that you can deduct your mortgage interest from your taxes. This is an itemized deduction that can lower your taxable income. Realize, though, that your interest payment goes down as the years progress, so the benefit you get from this diminishes. Property taxes can also be deducted on your tax return, and that can be a benefit of homeownership.
- Appreciation: Your home may not always appreciate in value. Indeed, a recession can set you back a long way on the path to appreciation. Whether your home truly appreciates in value depends a great deal on your local market.
- Home improvements: It’s important to note that even though home improvements can add value to your home, it is not an increase that equals 100% of what you spent. If you spend $1,000 on home improvements, your home may only increase in value by $700 or $800. Rarely do improvements add to the value of your home to the amount you spent on them.
- PMI: This infographic leaves off PMI. If you don’t put 20% down, you have to pay for private mortgage insurance, and that adds another cost to home ownership.
- Rental utilities: Unfortunately, the infographic fails to take into account that many renters have to pay their utilities. This is a cost of renting that needs to be considered, as does the difference between how much utilities will cost in your new home.
- Investing in something else: If you can rent for much less than a mortgage, it is possible to the difference into another investment. Indeed, since by the time you pay interest and pay for increased utilities and maintenance on a home, it is possible that you will not actually, dollar for dollar, break even on your home — even if it does appreciate in value. Some maintain that you are better off investing your money in bonds, index funds or something else likely to offer better returns.
As always, you need to run the numbers for yourself, since situations are different, and market conditions vary.
Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own personal finance blog: Planting Money Seeds.