I’m not a big fan of blog posts that expose myths and realities. I think it’s kind of a lame writing crutch. So please understand that I’m not going to start dispelling all sorts of home-ownership myths. I am, however, going to address what I find to be the stupidest popular sentiment ever construed. “Renting is throwing your money away.” Just like Justin Bieber, I’ve heard it 10 million times, and I just want it to go away. It’s an ugly phrase that has been passed down from Baby Boomers who don’t know what they are talking about. And I’m drawing a line in the sand.
Renting makes a tremendous amount of sense in many different situations. And I’ll go even further to tell you that it might make sense for you if you are currently “buying” a home you can’t afford. You see, affording a home (in terms of buying it) isn’t as simple as affording the payment. This is usually where the problem begins. Most people think that if you can move into a house and pay a mortgage equal to your current rent payment, then you should do it. And frankly, this is where years of inter-generational advice has gone awry. It’s quite sad actually. You’re telling me that our parents never learned that owning a home is a hell of a lot harder than just affording a mortgage payment?
We all know that married couple that never should have gotten married. I know, that’s kinda rude. But it’s true. They tried to solve their relationship problem by getting married. That doesn’t make sense. And neither does buying a home you can barely afford, because you feel like you are missing out on home ownership. Squeezing your way into a mortgage is a bad idea. Barely affording a pair of shoes is bad enough, barely affording a car or a house can ruin your financial life for a decade.
Renting isn’t second place. Renting isn’t a consolation prize. Renting isn’t unAmerican. Renting is wise and controlled. Renting is disciplined and measured. Renting is throwing your money away…into an awesome bucket. Sick of living in an apartment? Then rent a house. Sick of renting a house that you are currently living in? Then rent another house. Do you see my point? You should take advantage of renting until you can truly afford a house. Several homebuilders that were in the business of “selling homes to people that could barely afford them” are now out of business. And it’s not because they gave everybody such a great deal. When the economy collapsed, the ability to sell homes to people that couldn’t afford collapsed too. But that practice will rise again. And you need to be prepared.
So, how do you know if you can truly afford a home (the way Pete the Planner means affording a home (man, that third person reference was a little much))? Well, affording the payment is certainly part of it. Your mortgage payment (including tax and insurance) should not exceed 25% of your net (take home pay) household income. And now for the magic number: you need 10% for a down payment. Yes, I realize that you don’t have to technically have 10% for a down payment. And yes, I realize that a 20% down payment allows you to avoid PMI (Private Mortgage Insurance). But my number is 10%, and here’s why. If you can’t afford to scrap together 10% of the value of the home you are considering purchasing, then frankly you can’t (truly) afford to own the home. The proven ability to save money is an invaluable step in home ownership. Dishwasher goes out: you need money. Property taxes go up: you need money. Don’t want your house to have awful looking landscaping: you need money. My 10% home equity requirement isn’t about home equity. It’s about proving that you have the ability to save significant money on a regular basis.
Renting is not throwing away money. Your parents are wrong. I have had to try to clean up the pieces of hundreds of financial situations that are the result of buying instead of renting. There always is the exception to the rule. But you know what? The rule isn’t “renting is throwing your money away.”
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.