Many financial experts would advise you to purchase a home instead of renting because it is financially sound. It also offers people the chance to design their houses to suit their comfort and taste. And for many investors, homeownership is one of the key factors in building wealth.
Chloe A. Moore is a financial planner and often finds herself in situations where she gives people advice on homeownership. Moore used to hold the view that renting was throwing away money, however, when she bought her first home at the age of 27, she had a change of mind.
In 2009, she bought into the American dream and purchased her first house. However, after living her American dream for nine years, she decided to sell the house and downsize based on multiple reasons.
Homeownership can be more expensive than renting when you add up all the costs, Moore explains. When she purchased her house, she made a 3.5% down payment and paid several thousand dollars in closing costs.
In addition to the mortgage cost, she was responsible for private mortgage insurance, property taxes, and homeowners insurance, which was almost 10 times the price of her previous renters-insurance policy. And depending on the size of one’s down payment and credit score, private mortgage insurance can cost between 0.2 and 2% of the mortgage.
Once Moore was in her home, she noticed her costs started to add up. Her house was twice the size of her rent apartment and she found herself paying hefty utilities, maintenance costs, pest control, gutter cleaning, air conditioning, among others.
“This resulted in hefty utilities in the peak summer and winter months. Regular maintenance costs thousands of dollars each year and included yard work, pest control, a termite bond, gutter cleaning, and maintenance for heating, ventilation, and air conditioning,” she wrote in the Business Insider.
Eventually, Moore decided to list her property for sale and when she disposed of it, the sales price was just over $100,000 more than what she owed on the mortgage. The real-estate commissions and closing costs were just over $20,000, she added.
“When I added up the amount of money I spent on the down payment, closing costs, and house maintenance over the nine years I lived there, I barely broke even,” Moore said. “The growth in the home’s value averaged about 3% per year, which is close to the national average for real estate.”
As a financial planner, Moore said buying a home is almost always more expensive than her clients’ current living situation, and they underestimate the true costs of homeownership.
Also, many of her clients spend years saving up enough money for a down payment and lose out on the opportunity to invest. And some who are opposed to debt are tempted to use all of their extra resources to pay off their mortgage early and end up falling behind on building retirement savings, Moore said.
Since Moore sold her house and started renting, her monthly expenses are very similar to the monthly costs of owning her home, she said. In addition, they are more predictable and straightforward because she has only a few bills to pay each month.
“When something breaks, I’m no longer responsible for finding someone to fix it, and there’s no surprise bill,” she explained. “I also downsized, so I don’t have the hassle of cleaning and maintaining such a large space. Overall, I’m happier and less stressed.”
On renting going up each year, Moore explained that the principal and interest on mortgage remain the same year over year.
“As your home increases in value, the chances are that your property taxes and insurance also increase,” she said. “Additionally, as your home gets older, you’ll have more maintenance and repairs. You may spend money on renovations throughout the years, which isn’t necessarily a good return on investment.”
The financial planner advised that homeownership can be a good way to build wealth, but it can also sabotage one’s finances.
“One of the biggest financial mistakes I see is buying too much house. Even worse, having little or no savings after making the down payment can lead to more debt. More debt means more fixed expenses and more financial stress,” she noted.