Ramit Sethi, financial influencer and author of “I Will Teach You to Be Rich,” has focused on common money mistakes on his social media accounts lately. The mistakes range from treating your primary home as an investment to signing up for expensive credit cards you rarely use.
As a reporter who has covered personal finance for a decade, I appreciate that Sethi focuses on “money mistakes” that I’ve learned people often make, rather than beating a dead horse by telling followers to stop buying coffee.
Recently, X user @chiugene tagged Sethi in a post, asking “@ramit how much money will I be throwing away buying a home?” Sethi responded to @chiugene’s post with the following:
“When you buy, you’ll spend hundreds of thousands of dollars on irrecoverable costs like:
- Interest
- Transaction fees
- Maintenance
- Opportunity cost
But the real questions to ask are :
- How does the math work out for buying vs renting?
- What about the non-financial considersations?”
I noticed Sethi didn’t confirm the user’s assumption that buying a house would be a huge financial mistake. However, he did offer insights to help determine whether buying could be a mistake in their situation.
The up-front costs of buying a home vs. renting
There are several financial differences between renting versus buying a house. The first might be the most obvious: the up-front costs, such as the down payment and closing costs.
Some down payment requirements are high. For example, if you apply for a jumbo loan, the mortgage lender may require 20% down. But if you qualify for a VA or USDA loan, you don’t need to make a down payment.
Plenty of conventional loans allow as little as 3% down, and a handful of lenders offer 1%-down home loans.
Related: Financial influencer warns homeowners about this mistake
Closing costs can be a doozy, though — they were definitely a kick in the pants when I bought my first home. According to Freddie Mac, closing costs typically total 2% to 5% of the purchase price. On a $400,000 mortgage, that would come to $8,000 to $20,000.
That’s a wide range, right? Thankfully, shopping around with three or four mortgage lenders can help you lower those costs. Every lender charges different closing costs, and you can compare fees between companies.
The down payment and closing costs are short-term financial commitments, but homeowners should also consider the bigger picture.
“If you buy wisely then the home you purchase should increase in value over time,” Melissa Cohn, regional vice president of William Raveis Mortgage, LLC, told TheStreet.
“You do have to consider the closing costs and … the [down payment] but that will hopefully get made up with the appreciation of the property,” Cohn continued.
Other financial differences between renting and buying
Depending on the house you buy, your mortgage payment might be lower than what you currently spend on rent. Or it could be higher. But there’s a crucial difference between monthly rent and mortgage payments. Landlords have the right to raise your rent, and in general, rent payments increase over the years.
If you get a fixed-rate home loan, your monthly mortgage payments toward the principal and interest remain steady over time. (Your property taxes and homeowners insurance costs could increase, though.) This provides security, making it easier to budget and plan for the future.
More about homeownership and mortgages:
- Zillow, Realtor.com uncover best time to sell home
- Mortgage rates increase for 3 straight weeks
- Fannie Mae predicts shifts in mortgage rates, housing market
The third major financial difference between renting and buying is the cost of ongoing maintenance and repairs.
Home maintenance is less expensive for renters than homeowners, because the landlord covers the costs. If you buy a house, it’s crucial to have a savings account or bucket specifically for repairs. This way, maintenance doesn’t eat into your cash flow.
Cohn also pointed out that strategic repairs and renovations will increase your home’s value. A higher value could pay off when you sell, refinance, or get a home equity loan or home equity line of credit (HELOC).
Non-financial considerations when buying a house
The decision about whether to buy a house or continue renting doesn’t only center around money. Buying might otherwise make all the financial sense in the world, but if it doesn’t fit with your current lifestyle, you could still be “throwing away” money, as @chiugene put it in his question to Sethi.
One non-financial consideration is whether you plan to stay in the same area for a long time. If you expect to move in a couple of years, buying a house probably won’t be worth the time commitment. (Plus, you could easily end up losing money when you sell.)
Also, are you ready to be your own landlord? Some people prefer to have someone else take care of home repairs and maintenance for them.
Are you itching to make your place feel more like a home? I remember during all those years of renting, there were rules about what kind of changes I could make to the apartment or house.
“If you buy a home then you can renovate and make any changes that you want to the property,” Cohn said. “If you rent you are likely going to be very restricted in what you can do.”
Once my husband and I bought a place, we painted my home office and replaced the front door. After a few years, my husband even built a better fence for the front yard. We would never have been able to make these moves in the places where we rented.
Buying a home isn’t automatically a waste of money. But, as Sethi pointed out on X, there are crucial questions to ask yourself before deciding if it’s a good financial decision for you and your family.