When renting a house or apartment to an owner, the tenant pays the owner a monthly fee at the beginning of the month. When buying a home, the buyer borrows money from the bank to pay for the home. The buyer must pay back a monthly amount equal to a portion of the borrowed money plus the interest associated with the borrowed money. Many people compare the difference in price between rent and mortgage payments, and since the monthly rent is lower, they decide to rent.
Rent payments are generally cheaper initially, which is interesting. But if you compare the total long-term financial differences between renting and paying a mortgage, you’ll likely see the opposite.
Rent payments go to the landlord as pocket money. Mortgage payments are an investment in an asset that is likely to appreciate. When a buyer pays a mortgage, the buyer’s equity increases. In other words, the buyer is building their own retirement account and not the owner’s.
When comparing rental payments to mortgage payments, there are a number of variables to consider, including property characteristics, location, condition, and property appreciation potential. Below is a table showing the average comparison between monthly payments and monthly mortgage payments, taking into account inflation.
As you can see from the table, we’re comparing a mortgage on a home that costs $ 160,000 to renting that home for $ 800 a month. Renting is cheaper for the first five years, which is what makes many people decide to rent. But, due to inflation, the rent becomes more expensive than the cost of the mortgage after those first five years.
Rent and mortgage payments for similar properties are only slightly different. The long-term aspects between the two, however, are significant. A tenant is not burdened with the long-term responsibilities that accompany home ownership, such as upkeep, upkeep, and the possibility of having to sell the home before they have a chance to move. On the other hand, while paying a mortgage, a buyer builds up capital in a business. While paying the rent, a tenant pays a tax to the landlord with no long-term financial benefit. Buying is a financially superior decision.
Buying a home is an investment, which means that an investor can lose or gain money depending on whether the asset depreciates or appreciates in value. A tenant does not have the investment risk associated with owning a home. However, in the case of real estate, an investor is more likely to make money. For example, properties sold in cities like New York, DC, and Miami are good investments because those areas tend to attract professionals who intend to stay for an extended period of time. Buying in an area like this, where the market is up, increases your net worth. In 2000, a home that cost $ 300,000 could be sold for $ 500,000 in 2017, which means that an investor who bought a home in 2000 and sold it in 2017 earned $ 200,000 from the investment. The potential to gain appreciation on an investment property is a huge benefit to the buyer.
People who invest in buying a home often enjoy more than just financial benefits. When buying a home, the buyer can redesign and make changes to the home. In other words, the buyer can customize their home in ways that a renter cannot. This gives the landlord a sense of control that a tenant does not have over their home. The result is that homeowners have greater life satisfaction, a more positive mindset, and a home that is tailored to the needs of the entire family and can be modified as needed.