Buying a house isn’t a bad thing to do with your money, if you’re ready to be a homeowner and you understand what you’re getting into. But if you’re justifying the purchase with the well-worn: “I just want to stop throwing away rent money,” you are about to engage in a dumb money move that only sounds smart because no one has worked out the math.
How could I possibly question the clear logic of this age-old wisdom? After all, you build up equity in a house. You don’t build equity by renting, right? Absolutely. But to inject a tiny bit of reality into this dubious wisdom, let’s look at the numbers.
To make the comparison simple, let’s say you bought a $240,000 home, putting $40,000 into a down payment. That leaves you with a $200,000 loan at 4.5 percent (assuming you have great credit and interest rates don’t rise). Your mortgage payment on that loan would be $1,014. Again, just to make this simple, we’ll assume that’s roughly the same amount you’d pay in rent. (Obviously adjust the numbers if your rent is lower or higher.)
But to get the mortgage loan, you would need to pay “closing costs” — these are a variety of fees that are paid for appraisals, title insurance, escrow services and to the lender to process your loan. Bankrate.com estimates that a homeowner who borrows $200,000 will pay an average of $3,754 in these costs. (You can get “no-fee” loans, but you usually pay a higher interest rate to get them, so you pay one way or another.)
In other words, if your rent and mortgage were exactly the same, you’d start out $3,754 in the hole by buying.
“Never fear,” you say. “I’ll get that back by building principal as I pay off my loan!”
Read more why buying a house may be a dumb move over at CBS MoneyWatch.