The kitchen at our townhouse...I miss all that space!
Recently, I received this letter from a reader and I asked her permission to share it with all of you so that you could weigh in on her dilemma.
Hello Frugal Girl!!
First let me say that you have been an enormous inspiration to me in the past couple of years. I have been able to whip my financial self into much better shape, largely due to the motivation and advice I’ve gleaned from reading your blog. So for that, a huge THANK YOU!!
One thing I’ve always hoped to read about on your blog and haven’t (maybe you have at some point posted on it? Not sure) is the dilemma of real estate and home ownership. I am currently driving myself utterly CRAZY trying to decide whether or not I should become a homeowner. I am 29, single, and have a net monthly income of 2,900. Since I’m a teacher, this income is pretty fixed and will not go up very much at all, if any. I will be debt-free this February, but have little savings. I’m wrestling with whether to take on a monthly payment (mortgage, hazard insurance, and taxes rolled in) of 1,150.00. That’s about three times what I pay right now as a renter (with a roommate).
I was dying to ask: If you were in my shoes, would you do that? Or would you keep renting? I am literally driving myself insane over this.
Was purchasing a home a difficult decision for you? I know we’re in very different situations, as I don’t have any kids or a husband (someday I hope!!), but I wondered what your advice would be.
-Claire
I’m so happy that my blog has helped to put you in a better financial position!
The rent vs. buy debate is a really tough one, and I’m no expert on it. However, in your current situation, I think I’d be inclined to keep renting.
Yes, when you own a home, some of your payment is going towards principal, but not very much (when we bought our townhouse, out of a $1000 payment, only about $100 went towards principal each month). So, I think you’d be in better financial shape if you kept renting and saved/invested the money you’d spend on your mortgage.
Also, I think it’s important to build up your savings before you jump into home ownership. When you own a home, a lot of unexpected expenses can pop up (you won’t have a landlord to pay for the heat pump or the roof or the pipe leak) and without a savings account, you could get into financial trouble very quickly.
Plus, in the current market situation, you’re going to need money for a down payment and for the costs associated with buying a house.
So, at least for the time being, I’d encourage to keep on renting with your roommates and to work hard at building up your savings account (my favorite savings accounts are from ING). Then in a year or two you can re-evaluate your situation and decide whether buying is right for you.
As far as my own personal story goes…Mr. FG and I rented a little one-bedroom basement apartment for the first 2.5 years of our marriage. After Joshua was born, the one-bedroom thing began to be very burdensome, so we looked into other options. Apartment rental prices weren’t a whole lot lower than a mortgage payment at that point in time, so we decided to buy. For us, it was a really good decision because we got into the housing market shortly before it exploded, and if we’d waited, we’d have had a really hard time getting into the market.
In the current housing climate, though, I wouldn’t say you should feel like you need to hurry up and buy…I’d be pretty surprised if housing prices started to climb anytime soon.
Readers, what are your thoughts about Claire’s dilemma? She’d love to have your input!
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Today’s 365 post: You’ve heard of a happy camper, right?
Suzanne
Friday 16th of September 2011
Wow, I just wanted to make sure that someone pointed out that you get to deduct your mortgage interest AND your property taxes from you income when you pay taxes which will make a fairly significant difference in how much you pay in taxes. What you really need to do is to figure out how much you will pay in taxes with and without the deductions. Many years ago, when I had a mortgage payment of approx $1100 a month - similar to you - I recall that I did the math and figured out that I was saving approximately $300-400 a month due to the tax break - bringing the "actual" payment down to $700-800 a month. Definitely have to do the tax math and then use those numbers to help with the decision!
WilliamB
Tuesday 30th of August 2011
Rent, without a doubt. Owning is not the be-all and end-all it's been touted to be - the past 4 years should be enough to show that. Plus the costs of ownership are a lot more than just the mortgage: maintenance, taxes, time, what if you want to move?, materiels to fix, possibly condo HMO fees...
Lolalo
Sunday 28th of August 2011
Go with the majority on this one - RENT. I can speak from experience. When you own your own home, you have unexpected repairs (plumbers, heating & air, roofers, etc.) that do not come cheap. For instance, our air conditioning unit went out recently, and it cost $3,500+. If I was renting, that would fall to the landlord. You will have annual insurance premiums, which you pay annually or pay additional to spread it out over the year. This adds to your monthly costs. You will have property tax due annually, which usually runs several hundred to a few thousand dollars. You will have yard expenses which include mowing, edging, blowing, cleaning gutters, trimming bushes, planting flowers, etc. Do you have all the necessary equipment (and desire) to maintain a yard or can you afford to have a lawn service? If you buy in some areas, they have a homeowners assocation fee that is usually due quarterly. You will have to replace appliances as they fail. Your utility bills will most likely be more costly because a house you buy is usually larger than your rental, therefore you will have more space to heat and cool. Will you need to pay for a security system? I suggest you look at the mortgage payment, then add the insurance, taxes, a minimum $100 monthly repair, yard maintance costs and see if it still looks appealing. Be honest and don't try to skew it to look favorable, because life happens and you can expect unexpected expenses. I recommend you keep renting until you have at least 20% to pay down and have six months of salary in your savings account. And - will you still be able to afford the other things in life that you enjoy? Travel, clothing, hobbies, etc? And having the flexibility to easily relocate is worth a lot - situations change. Home ownership is the American 'dream' that is highly overrated. You pay, you pay, you pay.......
Tina
Thursday 25th of August 2011
Wow... what an amazing deal! Is that a fixed rate? I'll go against the grain and I would buy. I would just live lean for the next few years to build up a savings plan and a repair fund. Home warranties are nice as they cover a lot of items in the house but read the policy as they don't cover everything. Plus, you can renew them every year for as long as you want. The thing that scares me about people who rent and I'm not speaking of people on this blog because they tend to be savers. But I know many older people in the retirement age that don't have anything saved and do not have property to sell to help pay the bills. They are living social security check by social security check and are depressed with no funds. Granted they didn't save when they were working and now are in a bind because their income dropped dramatically and they must pay rent still. So, I think some people are better off if they are forced to save. One way to save money is to own property. Is there someone in your family that you could talk to about finances and they could talk about long term goals (mainly, retirement goals)? In 30 years you'll be 60 years old and it would be nice to have a home paid for full and clear and then, you could spend your retirement money on things you enjoy instead of renting. There are many things you can do if your job changes or you decide to move, you can easily just become a landlord yourself. But you really have to look in the area to make sure rental income would cover your mortgage. Everyone had great suggestions about saving, etc... If you decide not to buy at this time, I'm sure there will be other low interest rate opportunities. But first, I'd figure out my financial goals and then, figure out what you need to do to obtain them. Good luck!!!
nilam
Thursday 25th of August 2011
Rent! Rent! Rent! A bunch of others have given great logic as to why you should rent and I struggle with it too; the idea of owning MY OWN home is one that is hard to resist. Although it feels like you're "throwing away" money when you rent, you're really not. By renting, you're saving up your cash and ultimately your freedom. If you spend a year continuing to rent, with the money that you're saving up (rather than paying mortgage), you have the option to put down a big fat down payment so your monthly costs are lower (which means more money to play with for the day to day), OR you could buy a bigger or more perfect home, or you could furnish your home exactly the way you want it. With the market the way it is, there is still no guarantee that house values will appreciate. It could go either way.