Some people believe renting is a good idea and others think renting is a waste of money. Those who think renting is a waste of money often have firm beliefs, as do those who have rented their entire life. However, these opinions are usually based on their specific personal circumstances rather than facts or mathematical equations.
When I was much younger, I vowed to never rent because I felt it was a waste of money. Why would I pay off another person’s mortgage when I could get a loan and buy my own home? Let me give you a little insight as to how that viewpoint punched me right in the face.
My Dumb Mistakes Make Me An Expert!
It was 2004, and I was 21 years old. I was young and dumb and recently landed a pretty good career. Compared to my past job of waiting tables, this new career greatly increased my income. I was living with my parents at the time, and they were charging me minimal rent.
I wanted to move out and get my own place, as you can imagine, but I didn’t know where to look. I did know one thing – I wasn’t going to rent an apartment. I was going to get a loan and buy a home.
Renting Is A Waste Of Money, Right?
My opinion was that apartments and rentals were a waste of money. Why would I help pay off another person’s mortgage? I was no fool – or so I thought. If you remember the housing prices in 2004-2005, you remember how incredibly inflated they were. I found I could not buy the type of home I wanted because everything was so expensive.
At 21 years old, I couldn’t get pre-approved for enough money to buy a large single-family home as I wanted. Rather than giving up and renting something cheaper, I took my pre-approval letter and worked with my realtor to find the nicest thing I could buy at the top of my price point.
If you have been through the home buying process, you know that banks (at least 16 years ago) would pre-approve you for amounts much higher than you could afford. My 21-year-old self didn’t understand that, and there I stood with a letter saying how much money someone was willing to give me.
Interest Only Loans Should Be Illegal
After looking around for a relatively short time, I fell in love with a 2 bedroom, 1 bath condo. I had to have it, and it was right at the top of my pre-approval amount. Unfortunately, I didn’t have the money to put the 20% down for a conventional loan – so I did the next “best” thing. I got an 80-20 loan with a 5 year ARM ( also known as an interest-only loan).
I paid 80% of the total purchase price with one mortgage, and the other 20% was another bank loan to give me the down payment. For 5 years, I would be locked into a low-interest rate, making my monthly payment “affordable.”
After 5 years, the interest rate changes depending on the state of the market.
As I type this I want to punch myself in the face. I was paying only interest on my loans and nothing on the principle.
What in the world was I thinking?
I wasn’t – that was part of the problem. In reality, the interest-only loan was pretty much the same as renting. I was making the bank rich, and I wasn’t paying the home off.
I was 21 and very dumb – and definitely not thinking what could happen after the 5 years was up. What a moron I was (and sometimes still am!). Well, as you can imagine, after 5 years, my luck ran out, and my payment skyrocketed. I could not pay the higher monthly payment and was left with an embarrassing stain (forclosure) on my credit for the next 7 years.
What I Should Have Done – Renting Versus Buying
If I could tell my 21-year-old self anything about this process, I would tell him to use some common sense and stop relying on emotion during purchases. This would have been the best process for me:
- Stay at my parents as long as I can until they kick me out and continue to stockpile as much cash as I can for a large down payment on a house.
- If I couldn’t take living with my parents anymore, find a place to rent with a reasonable lease that would allow me to stockpile cash for a large down payment on a house – or pay cash for the house!
I went out into the world thinking that renting was a stupid idea. Turns out I rented my small condo for 5 years and then left with a foreclosure on my credit report. If I had rented a home or apartment, chances are I would have been able to be smarter with my money and would have avoided the interest only scenario.
Renting a small apartment would have allowed me to save up at least 20% to avoid paying extra each month to pay for private mortgage insurance.
Use A Renting V. Buying Calculator To Make Your Decision
It can be difficult to crunch all the numbers yourself to determine if renting or buying is right for you and your family. Luckily, there are smart people out there who design calculators for just this scenario.
The people over at MortgageCalculators.info have a great free Rent or Buy Calculator which helps you quickly decide if it makes more sense to rent or buy, depending on your unique situation.
Here is an example of the initial information you need to provide to see what makes the most sense:
Their interactive calculator allows you to put in anticipated mortgage details related to:
- Monthly rent payment (used as total monthly home expense)
- Mortgage term in years
- Annual interest rate
- Private mortgage insurance
After providing this information, the calculator allows you to add other important fields to show how affordable (or not) purchasing a home will be for you.
The next information you can calculate involves:
- Annual property taxes
- Annual Homeowners insurance
- Monthly HOA fees
From here you can play with the numbers to see how much of a downpayment you need to make to get the monthly payment where you want it to be. In addition, the calculator shows how much money in interest you will pay over the life of the loan.
If you want to give the calculator a try for yourself, you can use it here for free.
Use A Rent Affordability Calculator
If you have made the decision that renting is right for you, a rent affordability calculator should be your next step. Don’t rely on your gut to determine how much you can afford, use a free calculator like the one here.
So Is Renting A Waste Of Money?
It depends. If you do not have a substantial amount of cash saved up to make a significant down payment – renting for a few years is the smarter move. If you want a home and have a significant amount of cash saved up, you can either purchase a home or continue to save until you can pay for it in cash!
Yes, it is possible to pay for a home in cash without being a millionaire. It takes persistence and patience, but it can be done. Unfortunately, I did not start with a good financial choice, which hurt me many years later.
Even after my dumb mistake, I was able to purchase another home and pay it off when I was 36 years old! If you want to read more about how my wife and I paid off our mortgage in five years, and how you can too, head over to this post.
Are you a financial expert because you have made mistakes and learned from them? Or are you in the process of becoming a subject matter expert? Either way, I assure you it is possible to get out of your mess and to improve your current situation.
Before you purchase that home, understand that adding a mortgage on top of mounting debt is a recipe for disaster. Get that debt paid off first before you go into further debt with a home loan!