In my last post, I wrote about considering trade-offs when making purchases. Today, I’ll start by digging into costs for most people’s largest expense, their primary residence. After costs, I’ll give an overview of what banks do when pre-approving you for a mortgage and what you can do to keep some control over it. I’ll close with a personal experience to highlight how we considered the trade-offs before renting the townhome we live in now. Let’s get started!
What actually are your housing costs?
Have you ever really thought about this question? Because it is far more than simply a mortgage or rent payment. Here is a list of other costs associated with being a homeowner or renter:
- Utility Costs (electricity, heat, cooling)
- Home Repairs
- Homeowner’s or Renter’s Insurance
- Costs for upkeep of the yard
- Time – for cleaning, taking care of the yard, and, if you live somewhere cold, snow removal
These are all areas you may want to consider before deciding to rent or buy a house. I know time doesn’t fit the ‘cost’ profile just right, but time will be a trade-off for when taking care of your home. We all value our time, so we should all consider how much time we will need to spend taking care of our homes. The table below describes how each of these costs can vary between homes.
Getting a Mortgage to Buy a Home
When you apply for a mortgage, the bank will usually approve you for a mortgage based on your income, total debt, monthly debt payments, and FICO Score. They will approve you for the maximum amount of a mortgage payment that they think you will be able to afford. Guess what? That does not mean you need to buy a house that costs as much as they approve you for. For example, a bank may approve you for a $300,000 mortgage. That means $300,000 is the most you can borrow to buy a house, but there is no obligation to buy a house that will require you to borrow $300,000. One thing I have done when applying for a mortgage the last two times was to tell the bank how much I wanted to be approved up to. I wanted to limit what we were going to spend on a house. And if your bank doesn’t listen to you, find a bank that will listen to you.
Housing Trade-Off Example
Whether you rent or are a homeowner, you had to make a decision on the size of the place you lived in, where you lived, and how much you wanted to pay. We had to make this decision when we moved to the Denver area. Our primary options were a three-bedroom, two-bathroom single-family home in Denver not far from a few local parks in a nice neighborhood and a three-bedroom, two-bathroom townhome near a state park for $300 less per month in rent in one of the Denver suburbs. Aside from the rent, we had a lot of other considerations between the two places. The townhome didn’t require any yardwork and had a community pool, and the utilities for the townhome home would be lower for water, sewer, heating, and cooling costs. The big plus with the house in Denver would have been the proximity to restaurants and breweries and just living in a historic area of the city. We ended up choosing the townhome, and even without the pandemic, it would have been the better choice for us. Another consideration with lower housing costs for us was the desire to explore Colorado while living here, so between utilities and rent, we probably pay around $400 less per month or $4,800 per year, which allows us to save and travel more. Even if you are buying a home, you can still think about saving on your home costs this way.
Wrapping Up
Overall, when looking to buy or rent a place to live, there are tons of factors to consider. Many of these factors will affect the cost of your housing, while others will affect your quality of life. Finding the balance for you and your family is likely the goal. Your mortgage or rent will likely be your largest monthly expense. I would recommend taking your time looking for where you want to live, and carefully consider the trade-offs and costs.
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