I know a guy who just got married and has already started the obligatory house-hunt exercise with his new bride. He asked me about the timing of buying a house in the context of overall market conditions and I asked him if he was financially prepared for homeownership. “Not really, but we’re married now and I just hate throwing money away on rent.” Renting a house is one of the smartest things you can do early in your marriage.
“Renting is like throwing money away every month.”
This is a fairly popular idea sold by the anti-rent crowd, including realtors, mortgage brokers and banks. In fact, there are many times when renting makes the most financial sense, particularly when you consider the costs and added risk of mortgaging a house. My newlywed friends have some debt to pay off, and have very little in savings. Just because they technically qualify (according to a bank) for a mortgage loan doesn’t necessarily mean they should take one.
“If I rent I won’t be building equity.”
Building equity in a home is not the only way to grow your net worth – there are plenty of other investment opportunities. Some could make the argument after the recent housing bubble burst that real estate is no longer a “sure” investment, even though I believe over the long term it is certainly safer than others. Think about it – there will always be new companies, new technologies and new services created over the years, but as far as I know we haven’t figured out how to invent new land. It is this limited supply that causes real estate to appreciate at a fairly reliable rate over the long term.
So renters cannot participate in this appreciation. Worse things could happen if you buy without adequate savings established. You could buy more house than you can afford and eventually be forced into foreclosure. You could buy a house that requires costly repairs at your own expense (versus passing the repair bills on to a landlord).
You may be required to buy private mortgage insurance on top of your payment, homeowner’s insurance and taxes, making for a costly monthly payment. The potential negative consequences for premature home ownership are endless. Conversely, renting frees you from many of those consequences. You do not need to worry about large repairs, taxes, PMI, and homeowners insurance (although renter’s insurance is a good idea to protect your contents).
“Homeownership is the American dream.”
I know it is, and a noble one. However, it is not wise to dig too deep a financial hole for yourselves early in a relationship. If you did a poor job planning for your wedding on a budget, you may already be in debt when you take your vows.
The first couple years of marriage are tough enough without struggling to meet a mortgage payment. The average home buyer commits thirty years to a mortgage payment of nearly $1,000 a month. Thirty years is an awfully long time to commit $12,000 a year (or more). Consider renting the first six months to a year to get to know each other, and the area where you decide to settle.
“Rates are at an all-time low.”
True, but even the lowest rates don’t make sense if you are really stretching to take on a mortgage payment that you cannot afford. Consider lowering the bank’s suggested 28/36 debt-to-income/obligations ratio to a more comfortable level based on your income. In the book The Ultimate Cheapskate, author Jeff Yeager advocates “buying a starter home and staying there.” Over time you may make improvements to the home, or expand if necessary, but your goal should not be to trade up every few years, a practice that continues to push your mortgage payments further into the future.
I personally think this is great advice, and something many newlyweds should strive for. If you cannot initially buy a starter home, look for a starter rental and move up when you can, but then stay put and pay off your mortgage early to speed up your plans for financial freedom.