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.

*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.

 

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