Fear of buying a home and committing to a mortgage is preventing many people who are renting from building their wealth through home ownership.
Certainly, there are many people who benefit from renting, and many households should rent rather than buy a home for numerous reasons.
But renting households hesitating to buy a home because they don’t want to pay a mortgage should understand that even renters are paying a mortgage – they pay the landlord’s mortgage, and they are building the landlord’s wealth.
Homeowners Growing Wealthier Than Renters
Homeowners grow their wealth by using their monthly housing payment to pay for real estate, in addition to paying for a place to live every month. As a result, homeowners’ net worth is 31 to 46 times higher than renters.
Renters pay for a place to live from month to month, but none of their monthly housing payment goes toward the purchase of real estate. Generally speaking, therefore, renters are not building their wealth in the same effective manner as homeowners.
Fixed-Rate Mortgages Remain Steady, But Rents Rise
If you are a renter, you’ve likely noticed that the cost of rent goes up over time. In fact, it probably rises faster than you would like. Even though increases might only be $50 or $100 each time, they can add up and eventually price you out of your home.
A fixed-rate mortgage, on the other hand, remains steady from month to month. This is why homeowners who have been in their home several years can have a very low monthly payment compared to people who are renting.
Renters who purchase a home with a fixed-rate mortgage find that they have more stability in regards to their monthly payment. They know what the monthly payment will be for the term of the loan (except for slight changes in taxes and insurance), and they don’t have to worry about rent increases from landlords.
This stability allows homeowners to focus more on building their wealth over time, rather than always paying market prices for rent.
Homeowners Build Equity
Another advantage of being a homeowner is building equity in a home as mortgage principal is paid, and as home prices rise. In this way, homeowners can think of paying their mortgage as a type of savings plan.
As equity builds in a home, the homeowner increases his wealth and has a number of ways he can use the equity, including a home equity loan and cash-out refinancing.
Homeowners Receive Tax Breaks
Homeowners receive several tax breaks that renters do not receive, which helps homeowners build wealth.
Here are a few of the common tax breaks available to homeowners, but be sure to consult your tax expert for details applicable to your situation:
- Mortgage interest paid.
- Points on home mortgage and refinancing.
- Interest on home-improvement loans.
- Property taxes.
- Private mortgage insurance.
- Home expenses and improvements.
These, and other tax breaks help homeowners build their wealth through home ownership.
Potential for Rental Income
Another advantage of homeownership is the potential for rental income. Some homeowners rent out a portion of their home to generate income, and some turn their current home into rental property after purchasing a new home.
Homeowners often have options to generate income that they would not have as renters. As a result, an increasing number of homeowners are realizing they can make money as landlords.
Homeowners who rent out their property are going one step further in the wealth-building process, essentially using other people’s money to pay for their real estate and thereby build their wealth.
Rent vs. Buy Calculators
Calculators that show the financial impact of renting vs. buying are very helpful, allowing you to see the numbers and review the facts to make an informed decision.
The New York Times calculator features a number of questions along with sliders that you can adjust. For example, the first question on the page is the price of the home followed by how long you plan to stay, mortgage details, closing costs, maintenance and fees, and more. You adjust the slider to the correct number for your situation on each of these questions; and on the right side of the screen, you will see a text box with a price in it. If you are able to rent a similar home for less than that number, renting is a better option for you at the moment.
The Trulia.com calculator is just as simple to use, whether you use their basic settings or advanced settings. Enter the target monthly rent, target home price, how long you plan to live in the area, the income tax rate, mortgage rate, and other information. On the right side of the screen, you will see two bars. The left bar represents renting costs while the right represents buying costs. If the buying costs are lower, then buying makes more financial sense.
The Realtor.com calculator is a bit more complex than the other calculators, but it gives you a full range of inputs. You answer similar questions, such as desired home price, down payment, interest rate, maintenance, and the like. Once you’ve entered your information, you click “Calculate” and it will let you know whether buying or renting is more advantageous.
Should You Buy a Home or Rent?
Deciding to buy or rent a home is a personal decision that has a lot to do with lifestyle choices that have a long-lasting effect on your personal finances.
In general, buying a home will make you a lot wealthier in the long run compared to renting.
If you are considering buying a home, it takes just a few minutes to prequalify for a mortgage. The entire process can be handled over the phone, and will arm you with the basic knowledge to decide how much to spend on a home and the costs associated with purchasing a home. So when you are ready to start the process of buying a home, we would be honored if you contact us.
The Marimark Mortgage Newsletter will keep you informed with important events in the mortgage industry that could impact your finances.
We especially focus on ways to save money on your current and future mortgages. And, we continually share the information we share with our clients, because we believe informed consumers are the best consumers.
Real estate agents, and other professionals in the industry, will receive an ongoing wealth of information that will help them serve their clients.
