To Rent or Buy House?
We always hear something like “Renting is throwing away money” and “Paying Rent is like paying somebody else mortgage”. Is Renting really wasting money?
First of all, Renting is not wasting money. You need roof over your head and you are paying for it. You will pay for it regardless whether you own or rent.
To understand this, You need to understand recoverable and unrecoverable components of mortgage payment. Your every mortgage payment consists of two parts - Principal component and Interest component.
Recoverable component is Principal component of your mortgage. Money you pay for this will accumulate as a equity in your house, which you can get via HELOC or when you sell your house.
Unrecoverable component includes Interest component of your mortgage, Maintenance fee/expenses, Property Tax and Home insurance. These are the expenses you cannot get it back.
Now coming back to original question, To Rent or Buy. If your Rent is more than your unrecoverable expenses of your house, It’s better to Buy, Else keep renting and invest the difference. If your house have basement unit, which can fetch you rent, You can subtract that value from your unrecoverable expenses.
Also buying is suggested for someone how cannot limit expenses if they don’t have commitment, So instead of spending away your monthly income, You are forced to save and build up equity which you can later use for retirement or kids education.
Usually it’s suggested to Buy only if you plan to live in the place for at least 5 years. Because that’s the time it’s on the average, Increase in your house price will meet all other expenses you spent on owning the house such as CHMC Insurance, Renovation costs and Realtor fees while selling.
Sounds complex? Experts have arrived at a magic number called 303. Multiply your rent by 303 and if the house you are planning to purchase is less than this value, Buying is a good choice financially.
This is just financial part of the question, But if buying your own house is your dream and gives you happiness, Go ahead and do it. But make sure you don’t consider it as an investment.