Rent vs Buy: Uncovering Hidden Costs of Homeownership

Over the next few weeks, we’ll be featuring snippets from an article authored by the National Apartment Association (NAA) and the National Multi Housing Council (NMHC) entitled Don’t Buy the Myths: Renting Can Be a Smart Decision. The Rent vs. Buy article focuses on 9 widespread misconceptions regarding the benefits of homeownership over rental apartments.

MYTH# 3: My mortgage payment will be less than my rent.

Your mortgage payment is just the beginning. The “hidden costs” of ownership can add up to thousands of dollars each year.

Do not expect to be able to afford a $1,000 a month mortgage because you can afford $1,000 for apartment rent. According to Suze Orman, your annual budget for additional homeownership costs should be around 40-45 percent of your mortgage. That means you’ll need to budget more than $1,400 per month for housing costs, not $1,000.

What makes hidden costs drive up monthly housing expenditures?

  • Property taxes: If you own a $200,000 home and your property taxes are 1.25 percent (the U.S. average is 1.38 percent, with a high of 2.21 in New Hampshire and a low of .40 in Hawaii) then you’ll need to budget around $200 each month just for property taxes.
  • Maintenance costs: Now that you are financially responsible for the upkeep of your home, you’ll need to budget about 1 percent of the cost of your home for repairs and maintenance. For a $200,000 house, this will be more than $150 a month.
  • Private Mortgage Insurance: If you make a down payment of less than 20 percent, you are also going to need to pay around $100 a month in PMI costs.

So, in this example, you would be paying around $1,450 per month for housing costs, a substantial jump up from $1,000 rent. Be sure to factor in these costs, as well as homeowner’s insurance, before you make the decision to buy a home.

For more information, check out the full Rent vs Buy article, which can be found at the MyNewPlace Apartment Guide.

Check back next week when we will feature Myth #4, “The Myth of the Constancy of Housing Costs.”

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