The Home of Your Dreams: Renting vs. Buying - Part II

Written by Monica Sandler

Monday, 02 February 2009 14:14

As you move through your career, your goal of owning a home is becoming more achievable. But when are you ready to buy? Being in the financial position to afford buying a house means not only providing a down payment, but handling additional monthly expenses - and occasional ones too. Owning a home is an obligation that includes more than just financial expenses, but it's the cost of ownership that should be your biggest consideration between renting and buying a home.

Simply comparing a rent payment with a mortgage payment is not an accurate analysis. As we mentioned in Part I, taxes, homeowners' insurance and maintenance costs add to your annual housing expenses. In most cases, says Ameri-Financial senior strategist Sean Levin, the continuing costs can add 30%-50% to the mortgage payment.

Let's look at the common costs of home ownership you'll have to come up with:

1) Property taxes - These taxes are assessed at the state and local level, and can typically add over $100 per month to a homeowner's expenses. "Taxes are assessed per $1000 of value," says Levin, "so as the property increases in value - which it usually does - the taxes relative to that value go up." And tax rates themselves can increase, too.

Home Value	Tax Rate	Property Taxes
$150,000	$12 per $1,000	$1,800 ($150/month)
$180,000	$12 per $1,000	$2,160 ($180/month)
$225,000	$15 per $1,000	$3,375 ($281/month)
$400,000	$15 per $1,000	$6,000 ($500/month)

2) Homeowners' Insurance - The cost to protect the building(s) is based upon the replacement value, and can include special circumstances provisions like plumbing or heating damage. Premiums can add more than $700 a year. Another insurance that may be required by your mortgage lender is Private Mortgage Insurance (PMI), which can tack on another $50-$100 per month (in some cases you may be able to wrap the cost into the mortgage).

3) Maintenance - When you own the home, it's up to you to pay for the furnace repair or the leaky roof. Although costs vary widely from community to community, you will likely pay thousands of dollars in repairs or remodeling during the time you live there. Here are some average costs:

Furnace Replacement	$8,000-$12,000
Bathroom Remodel	$5,000 -$30,000
Roof Shingle Install	$2 per square foot ($2000/ 20ft x 25ft)
Plumbing Repair	$30-$80 per hour

4) Closing Costs and Financing Fees - Most lenders typically look for 10%-20% of the purchase price as a down payment. If you need 20% down for a $200,000 home that equals $40,000. In addition, you'll likely pay the bank closing costs, such as an appraisal ($250 to $400), processing fee ($250-$600), title recording fee ($40-$75) and more. Add to that the interest charged over the life of the loan.

So you see, home ownership does add significant costs to your housing expenses. Of course, renting a home only obligates you to pay the rental payment, but rent could increase as well - and you don't gain any value in exchange for that increase. You do lose out on the financial benefits of home ownership by renting. We'll explore those benefits more in Part III.