Dumb Things People Say About Renting vs. Buying
Jim Dahle breaks down misconceptions about renting versus buying, covering hidden homeownership costs, how mortgage principal works, and what you actually pay for while living somewhere. The video challenges common assumptions people make about housing finances.
Talk a little bit about dumb things people say about home buying. There's a few of these out there that I think are worth talking about. Here's one. My mortgage is cheaper than rent. This is what people use to justify buying a home, which makes no sense whatsoever, right? You got to remember that a mortgage is the minimum amount that you're going to spend on housing every month. Rent is the maximum amount that you're going to spend on housing every month. There are a lot of expenses associated with owning a home beyond a mortgage, right? I mean, the mortgage includes the principal and interest. There is also insurance. There are property taxes. Now those are sometimes included in your mortgage payment that goes out once a month because your lender is doing an escrow account for you and paying those bills for you. But they are additional expenses. But beyond that, there's other things you have to do. When you buy a house, often you have a yard for the first time. You got to buy the stuff to take care of that yard. You have a driveway for the first time. Guess what? Now you need a shovel, or worse, a snowblower. If you live in Minnesota or Wisconsin or something, you've got to maintain the home, right? There's utilities, there is upgrades. You got to replace flooring every now and then. Guess what? Roofing is expensive and it doesn't last forever. There are all these other costs associated with homeownership. For example, I saw on the White Coat Investor subreddit the other day, somebody posted this to all the people buying houses because your mortgage is cheaper than rent in your area. Don't forget about Murphy's Law. I'm having to pay $7,000 for a new AC unit just a couple days before residency starts. I've owned the place since Ms. 2, so I'll still do well on it and don't regret it. Just an important perspective to keep in mind. Yeah. $7,000, right? How many months of rent does that cover? Covers a lot, right? That's maybe three months of rent. So keep that in mind that just having the mortgage be less than rent is not a reason to buy a home. It takes a much more in depth analysis when you're making this decision than that. Okay. Another thing you hear out there is throwing money away. And I think this is kind of silly because you're never throwing money away when you're spending it on housing.
You write a rent payment, right?
You're not throwing the money away. You're exchanging it to have a roof over your head for a month. If you go on vacation you're not throwing the money away. You're using it to pay for an airline ticket and some nights in a hotel and some meals and some entertainment.
Right?
You're not throwing the money away. So that's just silly. To say that renting is throwing money away and a mortgage isn't related to that is another thing people say, right? They say that a big chunk of this monthly payment you're making, this mortgage payment, is going toward principal. That you're actually, it's like savings. It's like you're getting the money back. You're not actually losing the money. Well, you got to look at the amortization schedule. And particularly with a little bit higher interest rates people are dealing with today, you might be surprised how little of that payment is going toward principal. For example, let's run out a mortgage that's 7%, which is what a lot of people are getting right now. Let's say it's a $200,000 mortgage. So your monthly payment is $1,330.61. This obviously doesn't include insurance or property taxes.
Right.
That stuff's all throwing money away just as much as paying rent is.
Right.
But that's your payment just over $1,300 a month. So how much of that 1300amonth is going toward principal? Well, the first month is $164. That's how much went to principal. So all the rest of that is going toward interest. So if interest is throwing money away, I guess it's deductible. But maybe you can adjust it for taxes if you're able to deduct it. But for the most part, you're throwing away $1,200 in order to save $164.
Right.
That doesn't make any sense. You get to the end of the year and basically on that $200,000, 7% mortgage, $2,000 has gone toward your principal. Let's say you stay in that home for three years. After three years, you have put a total of $6,546 toward principal.
Right?
So imagine this is a three year residency. You put 6,500 toward principal. That's it. What are the transaction costs? Well, this home is probably a 200, $250,000 home.
Right.
The transaction costs are about 15% of that. So the transaction costs are 40 grand.
Right.
And all you paid down on the principal is 6,500. So it's going to have to appreciate quite a bit for you just to break even in that sort of A time period. So anyway, don't listen to these dumb things people say about home buying. Your mortgage being cheaper than rent is not a reason to buy a home. The fact that renting is throwing money away is not a reason to buy a home when it's otherwise inappropriate. And it's not a big chunk of your payments that are going into your pocket. Most of it is going for mortgage interest and property taxes and insurance and other things that are throwing your money away. So keep that in mind. That said, I'm a big fan of ownership. I think people ought to own their homes most of the time for the big chunk of their life. And the reason why is that it pays you these dividends. Dividends of saved rent.
Right.
You don't have to pay rent when you own the home. We own our home. We no longer have a mortgage on it. But whether we have the mortgage or not, we still get that same saved rent dividend. But the thing about rent that's really bad in the long term is it goes up. This is one cool thing about at least the principal and interest payment on a fixed interest rate mortgage. That payment doesn't go up over time. Yeah, the property taxes and the insurance does. And so that escrow money does go up over time, but the principal and interest doesn't. Assume you didn't do some variable rate loan or took out a HELOC or whatever using your home as an atm. It goes down. And that's not the case when you're a renter. In the first two or three years, that doesn't matter much. But if you're renting for 15 or 20 years, that's a pretty significant difference in your housing costs. And so I'm a big fan of ownership. I want you to own a home for long term. I don't want you buying a home the second you get to a new city. You're not even sure if you like the job. I don't want you owning a home when you're in a three year residency. Yes, last few years appreciation has been so high that a lot of people have still come out ahead. But you can't bet that way. Most of the time that does not work out. You got about a 50, 50 shot at five years. And so you know, if you're in a five year residency, maybe it's worth the gamble. But there's so many other hassles of owning a home during residency. I don't even know that I'd do it then. I certainly wouldn't go back and buy a home in med school or residency. What I know now you'll have plenty of time to build home equity as an attending physician or other professional. You don't have to rush it.
The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.
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