I’m seriously messed up in the head. Part of me thinks Girl Ninja and I should buy a house in the next six months (because interest rates are so low), while another part of me wants to rent for at least a few more years. My thoughts on home ownership change every day, and today I’m feeling like renting is kicking owning’s butt.
The most common argument AGAINST renting is that you are essentially throwing your money away. Let’s take a look at how this argument applies to the Ninja household.
Girl Ninja and I should be able to find a nice 2 bedroom apartment for about $1,200/month. Aside from utilities, the only other rental cost we’d have is renters insurance ($15/month). To keep things pretty, lets just estimate $1,300/month for living costs (including utilities). That’s $1,300 a month down the toilet.
Now let’s look at buying (this is where things get interesting).
If Girl Ninja and I were to buy a house, we’d be looking for something that we could live in for at least the next ten years. Probably a 4 bedroom/3 bathroom house in a good neighborhood. Where we live (Seattle-ish), this would cost us around $400,000. Right now, we only have enough saved to put $40,000 down (10%), leaving us with a $360,000 mortgage.
We could probably get an interest rate in the high fours to low fives, so let’s just assume a 30-year fixed mortgage at 5%, resulting in a $1,932/mo payment. About $432 of that goes to principal and the other $1,500 goes to interest. Property tax hovers around 1.1% so that would be another $330/mo in property taxes. Since we wouldn’t be able to put 20% down, we’d have to pay PMI, costing about $150/month. Home owners insurance would run us about $50/month. And let’s just say $130/mo for utilities. This brings our monthly payment to about $2,592. With only $432/mo going to the principal, we’d be spending $2,160/mo on all that other crap. Over the course of a year we’d pay about $20,000 in mortgage interest. This is tax deductible, which would reduce our net out of pocket (on all that crap) to about $1,744/month, instead of $2,160.
Do you see where I’m going with this? I admit, we ARE essentially throwing our money away by renting. But not as bad as we would be by purchasing. Interest, property tax, PMI, and home owners insurance ARE NOT investments. They are expenses. We are actually throwing away $444 ($1,744 – $1,300 = $444) less per month by remaining renters.
In my opinion, owning makes financial sense under two circumstances.
1. If you have a lot of cash, you can put down a huge down payment, which in turn eliminates PMI, and reduces the total interest you pay to your lender. In the example above, Girl Ninja and I would have to put about $150,000 down in order for owning to start making sense.
2. The other situation in which owning makes sense is when you are looking to buy something similar to what you are renting. You’ll notice Girl Ninja and I are fine renting a small two bedroom apartment but we would never buy a two bedroom house. When the time comes for baby ninjas (and more bedrooms) we can start looking at owning a three or four bedroom home, since we’d have to rent something of that size anyways. No reason to pay for bedrooms we don’t plan on using.
Is my logic flawed? Did I overlook anything? Why does renting get such a bad rap?