The “renting vs. owning” debate is a classic one that tends to flare up when either home prices or rents make a steep rise. At this juncture in the economy, rising rents are making headlines, and not just in the usual metropolises like Manhattan and the Bay Area.
When faced with the decision to continue renting or buying, there are a number of lifestyle and financial factors to consider. You can visit rent vs. buy calculators, such as this one, to get a basic grounding for your city. It’s also a good idea to meet with a realtor to understand what types of homes are available in your price range and to gather more local intelligence on the market than hypothetical calculators can give you.
Unfortunately, when rents rise, people tend to get antsy and can make premature and hasty decisions to buy. The thinking goes that when rents hit a certain threshold, a mortgage payment can be cheaper for the same quality of home with the added benefit of building equity.
But not so fast.
Before pulling the trigger on a new home purchase, you should consider the total cost of ownership and not just the sticker price. Here are three key additional costs that new home buyers habitually overlook until it’s too late.
Closing costs can quickly add up and be a key obstacle in making profitable home purchases and sales in a short-term window. Even in quickly appreciating markets, closing costs and realtor fees can eat into any profit you have made through building equity, particularly if you are planning on living in a home for two years or less.
Property taxes vary wildly by county and state and are crucial to investigate when comparing homes. These types of taxes can make or break your budget even if your mortgage payment is comfortable. You can look up property tax data on public record databases.
Home Owner Association (HOA) / Condo fees are another factor to budget for if you are buying a property within such an association. In addition to regular monthly or annual fees, one-time assessments to maintain communal property assets can be levied on homeowners and cost thousands of dollars without warning.
Maintenance costs are another issue that can be unpredictable. While you can always wait to update that bathroom or kitchen, you have less flexibility if your heat goes out in winter or your roof begins to leak. Replacing such big ticket items can be a true budget buster if you are already struggling to meet your mortgage payments.
Personal finance experts counsel first time homebuyers to save a dedicated emergency fund to help defray the above costs, in addition to having the money to put down a substantial down payment.
Whether or not you choose to rent or buy, do your homework and make sure you understand the total cost of ownership before buying your first home.