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So you’ve come to this post questioning if homeownership is cheaper than renting.
I had the same question…which is why I wrote this post.
It seems like every time someone finds out that I’m still renting I get the same response. “Why?! Don’t you know a mortgage costs the same amount or less than your rent?”
At first, I would slap myself on the wrist for being so dumb and excitedly browsed through listings on Zillow. I’d check the mortgage payment estimators for the homes that I’d fall in love with, but the amounts would immediately cause my eyebrow to raise.
I decided to do my own research to answer my question and here are my findings.
What’s included in a mortgage payment?
Principal. This is the original amount of your loan (what you borrowed). If you get a 150,000 mortgage loan then that is the principal.
Interest. The devil! JK (or am I?). This is the rate that you pay the lender for your loan.
Taxes. Ah, yes. Everything must come with tax right? Real estate taxes are added to your mortgage payment and it is often based off of your property’s value.
Insurance. You don’t want your dream home to burn to ashes because of a Thanksgiving turkey, so insurance is there to protect against damages. If your home is purchased with less than 20% down, then you are required to pay a private mortgage insurance (PMI) fee in addition to your insurance.
What is PMI?
Private mortgage insurance protects the lender (not you) in case you stop making payments on your mortgage and go into foreclosure. It is often added to your mortgage payment, thus increasing the amount.
Pros of buying a home
Tax breaks. Homeowners receive some of the biggest tax breaks on interest paid, property taxes, etc.
Privacy. When you’re renting, your neighbors are often above you, beside you, and/or below you. Buying a home gives you more privacy and free reign to do as you please.
Fixed-rate mortgage. Mortgages often have a fixed-rate, which means the payments don’t fluctuate over time.
Building equity. In simpler terms, home equity is the portion of the home that you actually own. As you pay down your mortgage loan, equity is built.
Bragging rights. There’s nothing more satisfying than being able to tell everyone that you just purchased your first home!
*You can get free personalized mortgage rates with LendingTree in under two minutes. LendingTree has one of the largest networks of lenders in the nation and allows you to evaluate your loan options without impacting your credit score. You can also use their mortgage calculator to estimate your payment and get access to your credit score for free.99.
Related reading: Track Your Credit Score With Credit Sesame
Cons of buying a home
Maintenance and repairs. When you buy a home all maintenance and repairs are on your dime.
You have to stay put. When you’re locked in a mortgage, you lose the flexibility of packing up and changing locations.
Down payments and closing costs. Renting often requires a small deposit, but when purchasing a home down payments and closing costs can punch a huge dent in your account.
Other monthly expenses
It’s easy to get caught up in the “new house feels” and completely forget about your other monthly expenses when you’re determining how much house you can afford.
Trust me, I know.
When you’re budgeting for a new home, be sure to leave some wiggle room for any future expenses in addition to your current expenses.
Related reading: Budgeting for Beginners
Think about it. When you’re locked in a 30-year mortgage are you really going to go 30 years without taking on a new expense, such as a new car? Probably not.
Do I qualify?
Although lenders will have varying requirements there are certain qualifications that are pretty standard.
Credit score. Your credit score is one of the leading factors in determining your eligibility for a mortgage loan. It is recommended to have a credit score of 680 and above. Anything less than 620 may result in higher interest rates, larger down payments, or even rejection.
Lenders will often look through your credit history for things such as any late payments in order to determine the likeliness of you paying back your loan.
I recommend using Credit Sesame to check out your credit score and report beforehand. It’s completely free, and it helps to strengthen your score by showing you what is negatively affecting it and how to fix it. You can also get your credit report from Annualcreditreport.com.
Income. It should come as no surprise that you must prove that you have a consistent source of income. No money means you cannot pay back a mortgage loan.
Debt-to-income. Your debt-to-income ratio should be no more than 36% of your gross monthly income. Lenders will often use front-end and back-end ratios to determine how much you can afford.
The front-end ratio will be your monthly housing expenses (mortgage payment, insurance, etc) divided by your gross income. Your mortgage payment shouldn’t be over 28% of your income before taxes.
The back-end ratio will be your monthly debt payments (loans, credit cards, etc.) divided by your gross income. Your back-end ratio should be no more than 36%.
Down payment. Lenders often require a down payment to motivate you to make your mortgage payments. If you lose the home, you lose the down payment you made as well.
It is recommended to have at least 20% of the purchase price to put down, although more people are now putting down less than that amount.
If you’ve read through some of the qualifications and have determined that you don’t qualify, don’t be so quick to cross out homeownership from your goals list. There are multiple programs available to help you purchase your first home.
FHA loans. These loans are backed by the Federal Housing Administration. It is a popular choice for first-time homebuyers and those that do not qualify for conventional loans. With a credit score of 580 and above, you can put down just 3.5% of the purchase price.
HUD homebuyer programs. Homebuyer assistance programs are offered from state to state and may have varying qualifications. These programs often offer grants to help with closing costs and down payments for those who qualify.
A simple Google search for homebuyer assistance in your state should direct you to these programs, or you can find them through the HUD website.
VA loans. VA loans are offered to retired and active vets that require no money down or mortgage insurance.
USDA loans. This program is offered through the U.S. Department of Agriculture to homebuyers in rural areas with low to moderate incomes. It requires no money down and comes with cheaper mortgage insurance.
Is buying a home really cheaper than renting?
Although this answer will vary from person to person, from the information above I feel it’s safe to say that renting is often cheaper than buying a home.
Many may wag their finger in disapproval of you “wasting money” by renting, but buying a home is a huge financial decision and one that should be made only when you are ready. Homeownership comes with many perks, but also many expenses so be sure to go into the process educated and financially prepared.
Check your rates and determine if home ownership is right for you.