Renting but Thinking About Buying a House? Suze Orman Warns Against Making This 'Rookie Mistake'
- Many renters may assume that they can afford a property if their mortgage payment is similar to their rent.
- Suze Orman has described this as a rookie mistake, because there are additional expenses to take into account.
- Don't forget about property taxes, insurance, and maintenance costs.
Owning a home is a whole different ball-game than renting, according to Suze Orman.
If you are currently renting a property and are thinking about buying a home, it's vital you go into the purchasing process fully informed. You'll be making a huge commitment and you absolutely need to ensure that your mortgage payment and other new housing costs will be affordable for you.
Unfortunately, finance expert Suze Orman warns that many people make a dangerous mistake when deciding how much house they can afford to buy for their first property.
Here's Suze Orman's important warning for first-time home buyers
Orman's words of caution for first-time buyers are vital for anyone who is currently renting.
"If you are a first-time home buyer, please do not make the rookie mistake of thinking that your current monthly rent is a good guidepost for the monthly mortgage payment you can afford," Orman said.
This may seem like a strange warning. After all, if you're paying $1,200 a month in rent, it's natural to assume you could just pay $1,200 in monthly mortgage costs. After all, you'd still be paying the same amount each month, right?
Unfortunately, the answer to that is definitely not. "As a homeowner you will have significant additional costs: property tax, insurance and maintenance," Orman explained.
See, when you rent, your landlord likely insures the structure of the property for you. While you may pay for renter's insurance to cover your personal possessions, this is almost always likely to be far cheaper than a policy on an entire house and its contents. And your landlord almost definitely covers property taxes when you rent, which you'll be on the hook for once you're the official owner of a property of your own.
Your landlord also takes care of repairs and routine upkeep for you, but that will change when you're the homeowner. You're going to have to pay for new appliances or a new roof if they break, or cover any and all other repair costs once you become an owner. And even if nothing goes wrong, routine ongoing maintenance costs such as cleaning out air filters or gutter cleaning will now be done on your tab.
These added expenses mean your ongoing ownership costs are likely to be much more than just your monthly payment alone -- which is why Orman warns against using this as a measure of affordability.
How can you make sure your property is actually affordable?
So, rather than assuming you can afford a property if the mortgage payment is the same as your rent, what should you do instead?
"My rule of thumb is to add 30% to the base cost of a mortgage to cover all those expenses," Orman advised. "For instance, if the base mortgage is $1,000 a month, I recommend assuming your monthly cost to cover tax, insurance and maintenance will be $1,300."
This is pretty good advice to follow, and those who are thinking about purchasing a property should strongly consider heeding her words. Otherwise, first-time buyers who are transitioning from renting could find that they end up not being able to afford their home after all if they make the rookie mistake that Orman warned about.
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