If I’ve heard it once, I’ve heard it 100 times. Why would I rent when I can buy and pay less? I can be building equity. I’m throwing my money away by renting. Yes, those statements are somewhat true. Let’s break it down and talk about the facts and myths and let you make your own decision.

The numbers make sense on the outside. You can buy a home on a 30 year fixed rate mortgage and often have a payment less than you can rent the same home for, and you’re building equity. Numbers don’t lie…or do they?

I remember clear as day looking at homes to buy that I could get for less payment when I was having my breaking point. Right in the middle of stressing out about how I’ll get groceries next week, I was thinking that it would be a great time to buy a house too. My landlord wanted to raise the rent and I thought I can’t afford that… “I’ll fix him!” and I started looking at houses that I could afford the payment. Sound familiar?

Myth #1: I’m throwing away my money by renting. No. You’re buying yourself time and patience by renting while you get yourself in the right spot. If you buy a house without being in the right financial spot, you’re heading for a disaster. If you buy a house before you’re financially ready, you’re just one hiccup (a layoff, a job loss, an illness, an injury, a leaking roof, a foundational repair, a burst pipe, a furnace, etc.) away from crisis mode.

Myth #2: You should buy a home on a 30 year mortgage. By buying a home on a 30 year mortgage, you’re opening yourself up to overpaying for a home by a landslide. Let’s take an average $200,000 home. If you buy that home on a 30 year fixed rate mortgage at 4%, the total cost of the home will be $343, 749. If you buy that same home on a 15 year fixed at 4%, your total cost will be $266,288. You pay a lot less in interest for the home and your payments are only about 30% more for the 15 vs 30.

So what if you bought your house at the age of 30, did a 15 year fixed mortgage and paid it off by 45? What could you do with that “mortgage payment” for the next 15 years? You could invest it and turn that house payment into another $500,000 for your retirement phase of life. Sounds nice, huh?

Myth #3: You don’t need a down payment. While this is true, you’ll be paying even more for the loan. PMI on a conventional loan until your loan is at least 80% of the home’s value. If you opt for an FHA loan, because it’s federally insured, they require MIP (Mortgage Insurance Premium) on all loans. If the loan was taken out before 2013, refinancing might be your only way out. If it’s after, there are other ways to drop this off. And then there’s the VA loan if you qualify. But these have other fees associated with the life of the loan if you put nothing down. All of these options will typically cost you anywhere between 1-2.5% of the loan value per year. So using that same $200,000 home, it will cost you an additional $2000-$5000/year to borrow money with no payment down, raising that monthly payment even more.

Myth #4: You need a good credit score to buy a home. In the ideal world to get a decent rate you need a good credit score or you need no credit score.

We get good scores by borrowing money, paying on those loans and continuing the cycle. You get no score by paying off all of your loans and closing those accounts. You’ll become indeterminable after about 1-2 years. You can get a decent rate loan with no credit score. You’ll need a mortgage broker who can do manual underwriting which will essentially prove that you do have the money to buy the home. Probably something more places should do, rather than using your FICO to determine that. All your FICO is truly good at is saying if you’ve borrowed before and how you’ve paid.

So now what? What do you suggest I do? Well thanks for asking, I was hoping you would!

First, I recommend that if you have consumer debt, you get on a budget and you get it paid off so that it doesn’t hold you back. One, you’ll find the process simple and not painful if you have this already going for you. But also, it gives you more options when looking at houses you really want vs. short term purchase thinking (which also rarely work out financially)

Second, even if you don’t take that advice, I recommend you have a full emergency fund of 3-6 months of household expenses. What will it take to operate your household if you had 0 income coming in for whatever reason (with the new expected house payment). Hint, this number is about $2000 less for the average American who has taken step #1.

Third, I recommend that you have 20% down if at all possible to avoid the PMI costs. This isn’t a deal breaker, but if we’re looking at the overall cost of your loan, on that same $200,000 home, it’s about $1700/year, and assuming 5 years to get it to 80/20, there’s another $8500 on your total costs.

Lastly, what’s most important that you take a step back and look at the numbers. ALL the numbers and make the best decision for you. Maybe there is a reason you’re pushing it before I would financially say you’re ready. I highly suggest you ask someone who’s impartial to the decision to run through the numbers with you on this whether it’s a friend, a family member (but be cautious here about emotional involvement) or a financial coach or advisor. Learn your numbers and go over a few scenarios and ask yourself how you’d handle them if you owned the home now. Buying a home is a highly emotional decision and a big one. It’s the largest financial decision that most of us will ever make in our lives. So think it through, learn your numbers and look at all of your options before jumping into the wonderful world of home ownership!

My first goal is always to provide you with all the information to allow you to make an informed decision! My second goal is to help everyone do what is not only best for your family, but what can get you on the path of building wealth the fastest. If you’re looking at buying a home in the near future, click here to set up a discovery call to see how I can help you to get there faster!