Last spring I decided to buy a house. I made 12 above-asking-price offers, threw out contingencies, and lost plenty of sleep before getting an offer accepted. I hadn’t even begun the mortgage process and I was already a wreck. I was sorely underprepared for the emotional rollercoaster and, like many of my peers in a similar situation, ready to throw in the towel when I finally had an offer accepted.
As much as I hate to admit it, the decision to buy a home was largely emotional. I had spent very little time evaluating the financial impact of continuing to rent versus buy. Homeownership is part of the American dream, so how could it possibly make more sense to continue renting?
Many of my millennial friends seem to leave the rental marketplace (some for good reason!), but few of us seriously consider the important factors that should be influencing our buy vs rent decision.
For most young homebuyers the thought of detailed financial analysis and spreadsheets is overwhelming yet the most neglected part of the homebuying process. We would prefer to spend our evenings lusting over the most recent listings on Zillow and dreaming of the day our home will be a featured post on Houzz. Our lack of financial knowledge and apathy could have a huge financial impact on our lives, yet we largely ignore it!
Enter the “Rent vs Buy Calculator” published by UpShot. This is BY FAR one of the most comprehensive (yet easiest to use and understand) tools I’ve seen to compare the financial impact of renting versus buying a home.
For those of you considering a home purchase take an hour or two to work on this tool before you enter into the largest purchase of your life. Don’t waste your time with lousy affordability calculators on other popular websites.
Here are a few variables you will need to consider before buying a home (many of which I did not):
Initial Costs: For many cash-poor millennials this will be one of the most important variables to evaluate. This includes your downpayment and closing costs (aka cash at closing!). Don’t be afraid to ask your lender to explain their closing costs because they may seem confusing for a first-time homebuyer. You may be surprised to learn that you can get a mortgage with far less than 20% down, so a good lender is important to walk you through your options.
Recurring Costs: These fees can add up quickly. Condominium fees, maintenance fees, association fees, etc. Oh, and when the dishwasher breaks a month after you move in that expense is now coming from your pocket.
Tax implications: Buying a home can have significant impact on your taxes, so don’t forget to take that into consideration. (I got some money back from Uncle Sam, which I’ll be using to replace the fridge from the 1980’s).
Future plans: timeline, inflation, home price appreciation and other future plans may have a significant impact on your decision to buy vs rent.
So, as tempting as it might be to partake in the American dream of homeownership, take some time to evaluate your financial situation. You might be surprised, it could make more sense to stay with that evil landlord of yours for a bit longer!