A different kind of renting | On Financial Success


Would you rent a house if you had to compensate the landlord for any depreciation during your stay? What if there was also a hefty move-in and moving-out fee?

What if the house was situated in a desirable neighborhood, contained the right amenities, and you could swing the monthly payment? Thousands of home buyers unknowingly enter this scenario when they take on a mortgage.

So how is this similar to the example? When a house is purchased, the home owner assumes new risks and responsibilities. When a mortgage is required, the risks and responsibilities are compounded. And even though we all think of the house as ours, the house really belongs to the bank until the last dollar is repaid.

So when does buying a house go from being a good decision to simply renting from the bank? This depends on three factors:

Renting from the bank

  1. The size of the down-payment. The smaller the down-payment, the bigger the bank’s stake in your house.
  2. The likelihood that the house will appreciate. Real estate has just finished experiencing historic levels of appreciation. Will the house continue to appreciate at least enough to keep pace with inflation?
  3. The length of your stay. The longer you plan to stay, the lower your real-estate transaction costs.

So why would anyone want to rush into a house if home ownership isn’t currently in their best interest? Home ownership has long been part of the American dream and for most people, buying a house is a highly emotional decision. Also, the mortgage industry has been very successful promoting the idea that almost anyone can afford a house right now and those who rent are throwing their money down the drain.

Renters receive valuable benefits

This ploy appeals to our emotions. No one enjoys throwing money away. Fortunately, this is not the case. Renters receive valuable benefits in exchange for rent. In addition to shelter, renters avoid: mortgages, maintenance, sharp property tax increases, and long-term commitments. These are important advantages in this age of skyrocketing property tax increases, a slowing housing market, and a mobile workforce.

How to tell if you might be rushing

  • Do you have a 20% down payment?
  • Will you need to wrap closing costs into your mortgage?
  • Are you buying because “houses are a good investment?”
  • Are you worried about being priced out of the market?
  • Do you really, really want to avoid renting?

How to tell if you’re ready to buy

  • You have an emergency fund
  • You have a 20% down payment
  • You can pay your closing costs with cash (without tapping into your emergency fund)
  • You plan on living in the same house for at least 5 years
  • Your mortgage payment, insurance, and taxes are no more than 1/3rd of your take home pay