I think it is very important for young couples to save money for awhile before they buy their first house and take out a significant loan. For one thing this gives them time to decide what kind of home will make them happy. It typically takes a few years for a young person’s thoughts about home ownership to properly mature. It is normal for their opinions to change as they experience what it is like to live together independent of their parents. But also there are financial reasons for waiting. By not buying a house right away they will save money because they will be able to earn interest on what they have saved up, rather than pay interest to a bank. Also, this gives them an opportunity to learn to live below their paychecks while not being under the stress of having a large loan hanging over their heads. This will help their marriage because it will relieve some of the financial pressure that would otherwise confront them as newlyweds.
However, many young couples insist that they must buy a house right away, because every dollar they spend on renting an apartment is money that is being “thrown away.” I disagree with this argument for two reasons. One, breaking even is better, in my opinion, than taking out a loan for a house that you really can’t afford. And secondly, the statement usually is not true. Many couples are actually saving money in the long term by renting an apartment rather than buying. Many young homeowners spend more money on non-principal housing related costs than they would if they still living in their old apartment.
Consider the following fictional scenario: Jack and Jill are a newly-wed couple who rent a two-bedroom apartment for $600 a month including utilities in a decent neighborhood in Sheboygan County. They have their eye on a house that will cost them $120,000 if they choose to buy it. They can afford to make a down-payment of $30,000 so they will have to borrow the remaining $90,000. They will have to pay an interest rate of 4.0 percent, which will come out to roughly $3,600 their first year. Their yearly property taxes will be $2,500, their utilities will be $1200 and their home insurance $500.
If you do the math you will see that Jack and Jill are currently “throwing away” $7,200 a year in rent, but if they buy a house they will spend $7,800. Actually, it will cost them even more than this to live in their new house, because they will be financially responsible for their own repairs. Carpets will need to be replaced, Refrigerators fixed, walls repainted, etc, from now until they day they sell the house. A very modest estimate is that it will cost them another $1,000 a year to maintain their house. That means they are spending $1,600 more each year for non-principal housing related costs than they were when they were renters. And it gets worse. They were previously collecting 2 percent interest on the $30,000 that they used for their down-payment. So they have just lost $600 of annual income. Therefore they are actually losing $2,200 a year by owning a house rather than renting.
Now all of this is not to say, of course, that Jack and Jill should not buy the house. They already have 25 percent down, which is nothing to be ashamed of. If they do all the calculations and decide that they can handle $90,000 of debt on their incomes, then I have no objection to them going ahead with it. However, if their plans for a future family are going to make it difficult to pay off the $90,000 loan, then I suggest that they keep on saving until they can safely afford the kind of house that they want. They are actually saving more money by renting than they would be if they went ahead and bought the house.