Keep renting or buy a place of our own? That is a question I have heard many times over my last twenty-plus years as a mortgage loan originator. It is a basic question, but carries with it so many important, weighty thoughts and considerations. “Buying is such a big commitment.” “I don’t want to throw my money away on rent any longer.” “What if I am buying at the peak of the market?” “I don’t want to deal with all the maintenance.” All of these thoughts, and more, swirl around in our heads as we think about buying a property. There are no right or wrong answers. All we can do is arm ourselves with as much information as possible and put it to use in making the best decision for our own, personal situation.
To start the conversation I have a phrase that I use quite often (I did not come up with this, I heard it somewhere along the way): "we are always paying a mortgage, we’re either paying someone else’s or our own.” If we start with that basic truth (there are exceptions to this of course, such as when we live with our parents or couch-surf with friends) then we can talk about when it makes sense to pay our own mortgage and when it makes sense to pay someone else’s? As a general rule, and you may guess what I’m going to say here considering the line of work that I am in, I feel that it’s better to pay our own mortgage.
Owning a home is one of the greatest wealth creators there is. Paying down a loan balance secured against an appreciating asset very rarely works out worse than paying rent. Yes, I know, I have heard all of the horror stories of the precipitous drops in real estate prices in places like Las Vegas, or Phoenix, or much of the state of Florida, but those were the exception rather than the rule. And as new-agey as it sounds, there is a significant feeling of pride and accomplishment in owning our own piece of land, a real, tangible asset. To help illustrate the difference between renting and owning I often prepare a rent vs. own comparison, and I try to customize this comparison to the client’s own financial situation. This means that I find out what the client pays in rent, and, as well, get a feel for what they might qualify in terms of a purchase. The comparison often starkly highlights the benefits of home ownership.
To illustrate the differences between paying someone else’s mortgage or take on paying your own, let’s take a look at a renter who currently pays rent of $2,500 per month and is pre-qualified for the purchase of a condominium at $450,000 with 20% down, or $90,000 (There are many mortgage options available for substantially less down, even as little as 3% down).
So what has this told us? Well, quite a few things, but let’s look at the highlights:
• For the first 4 years renting is cheaper on a monthly basis for the straight up reason that what you write your monthly check for is less that what you’d write it for to pay your mortgage (the assumption is a 3% annual rent increase), but then it gets cheaper and cheaper to own each year thereafter.
• Over a 9 year period, the rough average life of a 30 year loan, the appreciation gain on the home will be $152,203. This is using the forecasted, and what I would consider to be conservative, appreciation rate of 3.29%.
• Over that same 9 year period the amount of principal paid down, or, in other words, the amount of savings that an owner has built up, is $69,668.
• As the result of the combination of the appreciation gain, the pay-down of the principal balance on the mortgage, and the cash-flow differential, the owner has created $196,763 of wealth, or net worth, as compared to the renter. This does factor in the costs to sell (5.8% realtor commissions). I consider this fairly staggering and this to be THE KEY figure in this whole exercise.
• One fault of many rent vs. own comparisons is the over-emphasis of the tax benefits of owning. In the current tax environment there really is no additional benefit over the standard deduction that a renter would take.
Overall, when viewing this, it outlines why I have been in the lending business for the last 20 years. I believe in the power of homeownership. And, in all but a few cases, one should strive to own vs rent.
Author's Bio: Noel Bennett is a Branch Manager with Premier Mortgage Group in Boulder, Colorado. The first thing you will notice about me is my sincere desire to get to know you, your life, and your home ownership plans and goals. My favorite aspect of this business is developing long-term relationships with my clients, watching them grow, and their businesses or careers flourish.He was born in Madison, Wisconsin, but moved to Boulder at age 2 and has never left, graduating from both Boulder High and CU Boulder. The incredible community here, and the vast opportunities for fun and adventure that are in our backyard, are what has kept Noel a local. He is happily married to Shannon with our two children, Wiley and Barrett. In his free time you will find me on the ski slopes and trails, or cruising popular cycling routes, unless he is at home reading a favorite book.
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