Renting or Buying A Home? Which One is More Affordable?
Renting versus buying: the eternal question of how to pay for where you live. After watching the real estate market take off with few signs of slowing down, it has left a lot of people wondering if it is worth it to stop renting and buy a house. We have some recent facts and figures to potentially help you make your decision.
Consider your life and financial plans
Renting may be a more feasible solution for a fresh college grad, someone who just moved to the area, people who want to have fewer obligations tying them to one place, or someone looking to downsize and get their finances in order. For most people, renting is a temporary housing situation, whether that situation is for a few months or a few years. Take a look at what your life goals and financial goals are to assess whether buying or renting is right for you right now.
The biggest factor in the buying versus renting debate is affordability. As we mentioned above, renting is seen as more favorable to younger people who may not have the financial ability to purchase a house yet. Those earning less money will spend a larger percentage of their take-home pay on housing. Take a look at this graph from Keeping Current Matters that illustrates this using data from a recent report by the Urban Institute.
Despite the larger percentage at lower incomes, why do homeowners still pay less every month? That is answered by these next two points.
Buying a home is investing
Buying a home is an investment, but not like buying stocks or building a real estate investment portfolio. Buying a home for yourself is investing in your future. Say your mortgage is $1,800 per month. Every month, you are buying a $1,800 share of your home. That $1,800 share isn’t tangible, but it will grow over time as your home’s value appreciates. Every payment you make is equity because you own that much more of your home’s value. The longer you live in your home, the more you pay off and the more your home value rises (giving you free equity). The equity becomes truly tangible when you either sell your house or fully pay off your mortgage. Each time you pay rent, you won't get any financial kickback. You get to keep living in your home or apartment, but nothing else happens to bolster your financial standing. That is why homeownership is easily the best way to build wealth.
Your mortgage payments will stay the same (relatively)
Every year, renters can count on their rent going up, sometimes it’s $30 a month, sometimes $100 per month, sometimes more. If a renter weathers enough rent increases, they will be paying the same amount as an average mortgage payment, but without building equity (see above).
Homeowners will, by and large, pay the same amount every month for the life of the loan. Using the mortgage example above, you will pay the same $1,800 in July of 2021 and the same $1,800 in February 2038. If you feel inclined and your financial situation improves over time, you can increase your payments to $2,000 per month, helping you build equity and pay off your mortgage at a much faster rate. If your rent is $1,200 per month and you pay $1,300 for three months, you can get a credit from your landlord until the books rebalance, but you gain no tangible benefits in the long run from overpaying rent. In places like Boise, Fresno, and Gilbert, Arizona where rent prices have risen the most in the country, renters may have to move to a more affordable area or city if rents get too high too quickly.
The one exception to having the same mortgage payments is if you have an adjustable-rate mortgage, where your principal amount is tied to the changes in interest rates. Despite that—even as interest rates fluctuate over the years—your payment changes can be predicted and accounted for as the Federal Reserve announces rate raises or lowerings.
Since the real estate market in the Boise area took off in 2020 through to the present, housing prices have gone up and availability has gone down, making homeownership seem difficult or out of reach for many, especially first-time homebuyers. However, we are seeing supply beginning to increase and bidding wars starting to become less intense. Our team of experienced local agents asks prospective homebuyers who are ready to break the rent cycle and buy a home to get in touch with them, get a plan set, and exercise patience with buying a home. As pandemic panic continues to wane, more homes will come up for sale. As supply increases, home values won’t continue their harsh upward trajectory and it will become easier to buy a home.