The topic of home ownership for military families is a hot one. I absolutely agree that there are many reasons that a military family may want to buy a house: the pleasure of being able to do whatever you want to the house, the guarantee that you won’t have to move mid-tour, the difficulty in finding a place that will accept certain pets, even the possibility that you might make some money. It is a lot less clear whether buying a house makes financial sense for a military family. Let’s take a relatively generic hypothetical scenario and see how the numbers play out.
I’m going to use an imaginary house located in Hampton Roads. (It’s imaginary, but the numbers are backed up by research and experience. This article was originally published in 2016, when these numbers made sense, but the math remains the same.)
Purchase price: $200,000
Down Payment: $10,000
Purchase Costs: Seller agrees to pay half, so perhaps $4,000.
Payment: Principal and Interest at $907 per month, plus taxes $120 per month, plus insurance $80 per month, for a total mortgage payment of $1107 per month.
Owning The House
Let’s assume that this family is stationed at this location for three years. For those three years, they’re paying $1107 a month in mortgage payments, plus whatever maintenance and repairs are required during those three years.
They will have some repairs. Most analyses have determined that homeowners spend 1-4% of their house’s value in maintenance each year; we’ll use 2% to be simple. On a $200,000 purchase, the homeowners can plan to spend an average of $4,000 each year on upkeep and repairs, which equals $250 per month. For every month that they don’t spend that much, there will be a month in the future when they make up that “savings.”
Over a three year tour, the family will have paid $39,852 in mortgage payments and $12,000 in maintenance, for a total cost of $51,852.
This same house rents for $1300. Over three years, the family would have paid $46,800 in rent for the same property. Therefore, owning is costing them an additional $5,052 more than renting over three years.
When They Sell
At the end of the three years, the family has orders to move somewhere else. They decide that they’re not mentally cut out to be landlords, and so they sell their property. They’ve been lucky and the market has gone up a bit, so they’re able to sell for $205,000.
Of course, there are some costs to selling. They’re using a discount broker, so they’re only paying 4% in commissions, which is $8,200. They’ve agree to split the closing costs with the buyer, costing them about $4,000, so they’ll only receive $194,850 net proceeds from the purchase. After 36 months of payments, their mortgage has a balance of $179,548. After paying off the mortgage, the family will walk away from the experience with $13,252. That sounds great, until you consider that they spent $14,000 at the purchase, including the $10,000 down payment and $4,000 in closing costs. They’re actually coming out with $748 less than they had at the beginning of the story, plus they’ve spent $5,052 more in holding costs vs. renting, for a total of $5,800 more spent by buying.
This Is The Best Case Scenario
Keep in mind, this rundown is a pretty “best case” scenario. The family is able to get the sellers to pay half of their already low closing costs. They’re not paying any crazy points for their loan. They don’t have any large maintenance emergencies during the time they own their house, just typical stuff. They get a decent, not great but not terrible, interest rate of 4% on their mortgage. Their house is not in a flood plain, so they are not required to maintain flood insurance. (They probably should, but that’s another article entirely.) The house appreciates in the three years that they own. They sell with a discount broker. The buyers are only asking them to pay half of the closing costs for the sale.
Even getting a reasonable break on each aspect of the transaction, this family is still losing money on their home ownership experience. I’ve run a number of different scenarios, and this family needs to have several factors align in their favor before the math supports buying.
You can see the calculations here. I’m going to continue to add to them, playing with different markets and other variables. If you would like to customize this sheet to do your own math, you can click on Open With and select Google Sheets. Then click on File and select Make A Copy. Then you have your own spreadsheet!
Now, there are many reasons why you might want to buy even if it is going to cost a little bit more. For me, it is important that we not change schools during a tour. My husband enjoys being able to bang around in his own house. Pet owners sometimes have challenges finding rentals, and some people just really want to decorate. For these and many other situation, buying might be right even if the math doesn’t say so.
The important thing is not to assume that buying is always right, and look at the situation critically before using money as one of the decision-making issues.
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