The best thing to keep in mind when deciding whether to take out a mortgage, is to throw away any prior “common sense” knowledge you’re perceived to have on the debate. Don’t assume that buying a home is always the most cost-efficient option, and try to view renting as something more than just throwing away your money every month to “the man.”
Let’s break the argument down into three primary categories.
- Money sent to the land of no return. The general myth and stigma surrounding renting, is that the money you put in never comes back out. While not entirely untrue, it is perhaps unfairly criticized in comparison to the realities of mortgage payments. In the first five years of paying mortgage payments, 80% of the money spent on a mortgage payment goes to interest, which means that – assuming property values and rent sums are in sync – it will not be until 20 years into paying a mortgage that you see less money being “thrown away” on this interest, even at a fixed rate. And while you may see your mortgage payment dip below that of rent payments (which tend to increase by 5% per year) after about five years, it is important to consider where your money is actually going when you write your routine check to the bank.
- Monthly expenditures. One of the more obvious perks to renting as opposed to taking out a mortgage is the all-inclusive nature of most rental agreements. In many cases, utilities are included as part of the package, maintenance is largely your landlord’s problem, and property taxes are a relative non-issue. When buying a home, however, these expenditures – which had previously been your landlord’s issue to deal with – become your financial responsibility. Homeowner’s insurance, property taxes, and general maintenance can all accumulate to sums that cost almost as much as a rent payment itself. And while there are tax savings to be had from taking out a mortgage, the difference still has homeowner’s paying more in the long-term than they would be paying rent.
- Building equity. The core of the renting versus buying debate, building equity is in fact a valuable long-term investment and inherent advantage to buying a home. However, equity comes with its own set of risks and costs – it means properly investing in and maintaining a home, relying on the strength of the housing market (which currently is only appreciating at a 4% rate in today’s market), and buying a home in an area that you are safely certain will not result in a depreciating home value. It is entirely possible to become wealthy off of buying a home, but it is also not any more profitable to buy and sell a home after hefty down payments and expenditures than it would be to simply invest that same money in the stock market, which by comparison, would offer a 7-10% return.
Ultimately, there is no black and white answer to buying a home as opposed to renting, but there are factors to consider based on your lifestyle and financial means. Owning a home can be a wonderful thing, but it can also be a poison if investing in a home not intended to be permanent, making renting – at the very least – the short-term solution.
How about you all? In general, do you think buying or renting is a better choice? What situations do you think renting makes more sense than buying and vice-versa?
Share your experiences by commenting below!
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