In the United States, attitudes about renting versus buying a home are conventionally slanted towards buying. This perception is illustrated by a saying we have all heard, and most likely repeated: “I hate throwing my money away on rent”.
It’s easy to think that renting versus buying is truly the less desirable option, but this is not always the case. There are many circumstances that prove this myth wrong. Let’s look at a few:
Throwing away money on rent? Not in a down market. The majority of a mortgage payment for a new 30 year mortgage goes towards interest, not the principal. Usually only around 20% of what you pay on a mortgage goes towards your home. The rest is just – “thrown away”. And if your home is not appreciating in value, it could take years – up to 10 years or even more – to build enough equity to just break even on a home sale a decade down the road. This is a painful lesson that thousands of Americans had to learn through the recession of 2007-2008.
Fully one-third of home buyers move within 5 years of purchasing their home. As mentioned above, this is often too early to really build significant equity. Closing costs, fees, and realtor charges can further erode proceeds from a home sale.
The typical rule of thumb is to never buy if your mortgage payment is higher than what you could rent the property for. In some markets this is difficult to achieve – which begs the question, is buying the right choice?
What if you can get a mortgage for less than you’d pay on rent? A renter doesn’t have to pay expenses related to regular maintenance, wear-and-tear related repairs, or home insurance. And if a homeowner has to make a claim on their home insurance, future payments can really balloon into something serious. Renters also don’t have to worry about their property becoming outdated, or remodels. And don’t forget about landscaping. Once it’s all added up, is that mortgage really cheaper than rent?
People also commonly refer to a house as an investment. But with investments, whether in the stock market or real estate, there is always risk. Depending on the home, the cost, the market, the future market, and many other variables, an investment in a home can backfire.
There are as many considerations for buying versus renting as there are tenants and homeowners. There is no one “right” answer for everyone. Buying versus renting is a personal choice. No one should ever assume that “buying is better” without carefully considering the points mentioned above, along with many other variables. In some markets, renting has undeniably has its advantages!