Oh, the America dream. Work hard, save up, and buy a house with the perfect white picket fence. Most people envision owning a home at some point in their life. There’s something to the intangible benefit of calling a place your own. It’s also a huge contributor to wealth for the average family. At the same time, renting gives flexibility and is way less of a commitment. Buying a home isn’t something that should be rushed into. Anyone can use a rent vs. buy calculator, but the decision isn’t as black and white. Here are things to consider when debating renting vs. buying a house.

1. Less Obvious Costs

Comparing rent and a mortgage isn’t an apples to apples comparison. There are several costs to consider above and beyond the monthly mortgage payment. We were surprised to find out these ongoing costs were an additional 20% on top of our mortgage payment. Even within your mortgage payment, there are costs that don’t actually go towards the debt.

Transaction Costs: understand that real estate transaction costs are A LOT. Closing costs when buying a home average around $3,700. Usually the seller picks up the realtor fee, which is typically 6% of the sale price. This means that buying and selling a $300,000 home could cost roughly $22,000.

Insurance: you need to account for insurance such as homeowners, flood, and/or home warranty. Depending on your location, some insurances are required while others are optional. Some are included in the mortgage payment while others are not. Make sure to understand what you’ll be paying.

Maintenance: upkeep of the home and property can really add up. Lawn and yard care, repairing or replacing the roof, furnace, HVAC, water heater could become an unexpected surprise. It always amazes me how often we’re in Ace or Home Depot buying random things for the yard or home like grass seed or a toilet repair kit.

Taxes: unlike other assets you might own, your home is taxed even if it’s losing value. Property values tend to rise over time, and so will the property taxes. Some towns allow you to keep the property tax fixed, but this is rare.

2. Debt up to your eye balls

While a lot of people aim to have a 20% down payment, you do have the option to put down less. Assuming a 20% down payment, 80% of the home will be paid for in debt. Homeownership is a highly leveraged endeavor which leads to magnified gains or losses in the home equity. This means you can “double” your money if the home rises by 20% or lose the entire down payment if the value drops by 20%. During the first few years most of the mortgage payment goes towards interest, not paying down debt principal. This evens out after roughly a decade of paying the mortgage. You can play with the numbers HERE.

3. Prices tend to go up, usually…

Home prices tend to rise over the long run, but they can decline temporarily. How the home value performs is hyper localized. Some towns and cities grow and expand while other struggle. Detroit got crushed during the previous housing collapse. Using the S&P Case Shiller Home Price Index, Detroit peaked in March 2006, plummeted almost 50% by April 2011. They just recently recovered in November 2019, over 13 years later. Coupling this 50% drop with being 80% leveraged would lead anyone to being underwater for some time.

4. House Savings =/= Down Payment

Money saved for a home purchase is not the same thing as a down payment. You’ll need to have enough for closing costs and other fees at closing. Also consider things like furniture to fill the house, paint, or other work on the house to “make it your own”.

5. To buy or not to buy, with PMI

Private Mortgage Insurance (PMI) is typically paid when the equity in the home is less than 20%. This is common when buyers don’t have the 20% down payment. Although it varies by loan provider, PMI payments stop when the equity in the home meets or exceeds 20%. Many people view PMI as a negative attribute of home buying and strictly as a cost. Although it is another expense, PMI is what allows you to finance and afford a house without a 20% down payment.

6. Be ready for an emergency

Saving for a down payment can take several years to build up, but ensure you have a comfortable emergency fund as well. You might need that extra cushion when something needs to be replaced or something is damaged. Having an emergency fund is a good idea for everyone, but it’s crucial for homeowners.

7. It’s kind of personal

The decision to rent or own isn’t just a financial decision but a lifestyle decision. Think through how renting or owning a home would fit into your day to day. How would a yard add to your life? Do you mind sharing walls with neighbors in an apartment? How much would you value calling a place your own? Do you want a sense of community within a neighborhood? Would you be self-reliant when something breaks, or when painting the walls or fixing plumbing issues?

8. Time & Flexibility

Owning a home reduces the flexibility to move where and when you want. It comes with high transaction costs, lots of leverage, magnified changes in home equity, and minimal principal paydown in the beginning. All of these attributes lead to the risk of losing money if owning the home for a short period of time. It makes more sense to buy and pay down a mortgage if you plan to stay for the long haul. But if you’re unsure or planning to sell in a few short years, you may have to rely on luck for the numbers to make sense.