Renting or Buying a Home? Here Are 3 Things You Should Consider

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Are you a renter who is considering making the leap into homeownership? Homeownership isn't for everyone, and before you make that important decision, you need to know exactly what you're getting into. We asked three of our contributing writers to explain the most important things to consider before deciding to buy a home. Here is what they had to say:

Jason Hall: The reality is, you're almost guaranteed to spend more every month than you'll plan for if you've never owned a home. As a homeowner, I'll swear to this reality.

To start, you need to budget for the following things:

  • Property taxes
  • Additional insurance like flood or earthquake, not covered by your regular policy
  • Utilities you're not paying for now, like trash pickup, water, and gas
  • Services, like lawn or pool maintenance, or the cost (and time) to do them yourself
  • Repairs and maintenance; replacing old appliances

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Those are just the basics to keep your home livable.

You'll find things you want to change as well, like a flower bed, or new tile in the bathroom, or old, worn carpets. And I can tell you from experience how a small, few-hundred-dollar update can balloon into a full-on demolish-and-rebuild project costing thousands of dollars. And over time, you'll have more of these projects that need to be taken care of as your home ages.

Don't get me wrong, I'm a happy homeowner. But you need to go into it with your eyes wide open, and with the understanding that it will cost more time and money than renting, and you need to be prepared financially and emotionally for that commitment.

If you're fine with that and plan to be in place for a long time, homeownership can be fantastic.

It's an opportunity to enjoy the fruits of your labor, and have a lower cost of living for years ahead. It won't make you rich (see Brian's section below for proof), but it can add value to the quality of your life. However, if you go into it ignoring the costs, both financial and time-wise, it can also become an albatross.

Matt Frankel: One thing that should be a major factor in your decision of whether or not to buy a home is the length of time you plan on living there. If there is a chance you'll stay for less than a few years, it might not be worth it to buy.

Let's say you decide to buy a house for $200,000. And, we'll assume your closing costs are $4,000 for a total cost of $204,000. So, in order to simply break even on the house, you'll need to sell it for that amount or more, plus real estate commissions and closing costs, which you'll pay when you sell. Since this usually comes to about 7% of the selling price (6% for commissions and another 1% for seller's closing costs), you'll need to sell the home for nearly $220,000 just to be able to recoup your initial purchase amount. If you only stay a year or two, it's unlikely the home will appreciate in value by that much over such a short time.

In other words, in order for a house to be worth buying, you need to keep it long enough to overcome your closing expenses (both buying and selling) as well as commissions you pay. If you stay in the house for a short period of time, this is unlikely to be the case. In fact, you may even lose money if you sell too soon after buying.

Brian Stoffel: One of the greatest myths about buying a house is that it's a great investment. Nothing could be further from the truth, and there are huge opportunity costs to take into consideration.

The most important one is the initial down payment. Say you are buying a $250,000 house and putting 20% down. While putting that much down helps lower payments -- and avoid costly mortgage insurance -- it's important to understand what you're giving up. If you instead put that $50,000 down payment into a low-cost index fund that returned 9% per year, it would be worth $663,000 at the end of your 30-year mortgage.

Let's put that in a different perspective: Since real estate generally appreciates at a rate no better than inflation, your down payment would still be worth $50,000 in today's dollars at the end of your mortgage. If it was invested, however, it would be worth $287,000 in today's dollars -- assuming 6% real returns after inflation.

That's not to say you should never buy a house. There are lots of non-financial reasons to do so. But just make sure you're not buying because it's a "great investment."

The article Renting or Buying a Home? Here Are 3 Things You Should Consider originally appeared on Fool.com.

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