Despite what society tells you, home buying isn’t always a no brainer. You have to take a look at your financial circumstances and the current market environment. Before you make the decision to buy, let’s look at the key factors to consider and questions that can guide your decision-making process.

Phantom Costs
When building your housing budget it’s important to remember rent is the maximum you’ll pay but your mortgage is the minimum.

This is where “phantom costs” come into play. There are expenses that may not be monthly or recurring. This expense can be easily overlooked when you are budgeting for your home. Some of the most common costs are property taxes, closing costs, insurance, and ongoing maintenance.

Time Horizon
You’ve likely heard the advice “You have to buy a house and start building equity!”. While that’s true, it greatly depends on your time horizon.

If you plan on living somewhere short term, you may be better off renting. In the early years the majority of your monthly payment goes to interest rather than principal. In the chart below, you can see how interest eats up a large portion of your payments at the beginning.

Breakdown of Mortgage Payments

Opportunity Cost
Owning a home has been a key driver for wealth in the U.S. It acts as a hedge against inflation and serves as a forced saving mechanism. But that doesn’t mean it’s the only way to build wealth.

Over the last three decades, U.S. stocks have had an annual return of around 10%, while the annual growth rate for homes has hovered around 5%. Historically, you would be better off investing in stocks than buying a home.

If renting is a cheaper option, you have the opportunity to invest any extra savings into something else. This could be stocks, your business, or other investment opportunities.

Always bear in mind the concept of opportunity cost. Every dollar tied up in your home could have been allocated elsewhere, for better or for worse.

Question You Should Ask Before Buying 

Will I live here for 10+ years? Buying a home is more likely to pay off if you plan on staying put for a long time. This is mainly because closing costs and interest can eat away at any profits. Plus, if the housing market slumps this allows you more time for your home to regain its value.

Is my total monthly costs under 28% of gross monthly income? A general rule of thumb is housing costs shouldn’t take up more than 28% of your gross monthly income. This includes your mortgage, property taxes, insurance, etc.

Have I saved a 20% down payment? While not mandatory, having a 20% down payment can save you from paying private mortgage insurance (PMI).

Are you OK with all the responsibilities of owning a home? Owning a home comes with new responsibilities that you may not have had while renting. This could be regular maintenance, landscaping, snow removal, and more.

Am I OK if the value of my house goes down? Home prices are not guaranteed to always go up, especially in the short term. Make sure you are buying a home because you want to and not because you are counting on the value to increase in the short term.

Bottom Line
The biggest expense in most budgets is housing so it’s crucial you get it right. The choice between renting and buying depends on your individual financial circumstance and goals. At PMG, we’re here to help you run the numbers, ensuring you have all the information to make an educated decision. 

George Maroudas

George Maroudas

Twitter @ChicagoAdvisor

Disclaimers / Sources:

Mortgage calculation from BankRate Mortgage Calculator

Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment, tax, or legal advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. 

US stocks represented by the S&P 500 index total return. US stocks returned 9.89% annually from 9/20/1993 to 9/21/2023. Data from YCharts.

US Home prices represented by Case-Shiller Home Price Index. Home prices returned 4.69 annually from 9/20/1993 to 9/21/2023. Data from YCharts.

This material was created to provide accurate and reliable information on the subject covered but should not be regarded as a complete analysis of this subject. The opinion voiced is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.