Skip to main content

Less to Own than to Rent



The question is "financially speaking, are you better off owning than renting in the long term?"

Renting a home has advantages.  It is usually a short-term commitment from year to year and the landlord is responsible for the repairs.

Owning a home with today's low mortgage rates, the total house payment could easily be less than what the rent would be on a comparable home.  Once you assume ownership, you will have the responsibility of the repairs and possibly, a homeowner's association fee.

Many times, an initial benefit of owing a home includes the ability to deduct property taxes and qualified interest on the mortgage.  With the increase of the standard deduction and a limit of $10,000 on state and local taxes, it is estimated that 90% of homeowners do not itemize their deductions to consider property tax and mortgage interest.  This comparison will not consider them.

There are two very significant benefits that contribute to a home being an excellent investment and they are principal reduction due to normal amortization of the mortgage and appreciation of the property.  While the property goes up in value and the unpaid balance decreases, the owner's equity grows, increasing their net worth.

Renters do not benefit from either of these, but their landlords do.  That is the reason for the saying "whether you rent or buy, you pay for the house you occupy."  Tenants pay for the home for their landlord.

Rent

 

Own

$2,500

Rent/Payment

$2,232

-0-

Principal Reduction

$504

-0-

Appreciation

$875

-0-

Estimated Monthly Maintenance

$300

-0-

Estimated Homeowners Association Fee

$25

$2,500

Net Monthly Cost of Housing

$1,178

*Projections based on 3% appreciation; $350,000 sales price with 10% down payment and a 3.5%, 30-year mortgage.

With each payment made on a fully amortized loan, the principal balance is reduced.  While appreciation is generally expressed in an annual rate, homes go up in value incrementally throughout the year so considering the monthly appreciation is appropriate in this comparison.

In this example, the payment is less than the rent proving the initial idea that it costs less to own a home.  After factoring in the effect of the principal reduction and the appreciation, even when you consider the maintenance and HOA fees, the net monthly cost of housing is considerably less than renting.

The largest part of the savings inures to the equity of the home which directly impacts a homeowner's net worth.  While the money may not be easily accessed, it has real value and available in a cash-out refinance or when the home is sold.

If you curious about how your numbers would be reflected in a similar comparison, go to the Rent vs. Own.  Please let me know if you have any questions.

Comments

Popular posts from this blog

Paying Points to Lower the Rate

Two commonly known ways to lower your mortgage payments are to make a larger down payment especially if it eliminates private mortgage insurance and improve your credit score before applying for a mortgage. Another way to lower your payment would be to buy down the interest rate for the life of the mortgage with discount points.   A discount point is one percent of the mortgage borrowed.   Lenders collect this fee up-front to increase the yield on the note in exchange for a lower interest rate. A permanent buy down on a fixed-rate mortgage is available to borrowers who are willing to pay discount points at the time of closing. Let's look at two options on a $315,000 mortgage for 30 years at 4% interest with no points compared to a 3.75% interest rate with one-point.   The principal and interest payment on the 4% loan would be $1,503.86 compared to $1,458.81 on the 3.75% loan.   The $45.04 savings is available because the buyer is willing to pay $3,150 in points.   By dividi

Will Soft Inquiries Hurt Your Credit Score?

Soft inquiries, sometimes known as a soft credit check or a soft credit pull, do not impact your credit scores because they are not attached to a specific application for credit.   They can occur when a credit card issuer or mortgage lender checks a person's credit for preapproval purposes. Examples of soft inquiries are when you check your own credit or one of your current creditors checks your credit.   If you are concerned about the negative impact on your score, specify to the lender that you want a "soft pull" to see if you qualify for preapproval. Soft inquiries may appear on your credit report but should not adversely affect your credit score. Consumers are entitled to one free copy from each major credit bureau, Experian, Equifax and TransUnion, once every twelve months available at AnnualCreditReport.com .   Hard inquiries occur when a borrower makes a new application for credit.   These will impact your credit score and will remain on your credit report

Why a Home Should Be Your First Investment

Real estate has been described as the basis of all wealth.   Without considering income or investment property, buying a home to live in is an incredibly powerful way to build wealth or financial net worth. A home is an asset measured by the size of the equity.   Equity is simply the difference between the value of the home and the amount owed.   There are two powerful dynamics at work to increase the equity which include appreciation and amortization. Appreciation occurs when the fair market of the home increases.   The shortage of available inventory coupled with high demand has contributed to an 18% increase in value in the past year on average for homeowners in the U.S. Most mortgage loans are amortized with monthly payments that include the interest that is owed for the previous month and an increasing amount that is paid toward the principal loan amount so that if all the payments are made, the loan would be repaid by the end of the term. A 30-year mortgage at 3.5% intere