Growing up, we all dream of the day when we can move out from our parents house. Main reason…so we don’t have to follow their rules anymore. But that defeats the purpose if you continue to rent. Why? Because you still have to follow the rules of the landlord.
The greatest sense of independence is to own something that is flat out yours and you can do whatever you want with it. Paying your mortgage gives you that independent feeling, not paying someone else’s mortgage.
Before I got into real estate, I had the mindset that paying rent was better than a mortgage. I used to feel a sense of security renting a place because it didn’t feel like I was in debt to someone. Now that I look back, that was small-minded thinking on my part. In this article, I will discuss why it is better to have a mortgage than it is to pay rent every month.
Hopefully you will find this information valuable and you might think twice next time you are deciding to rent or purchase a home.
Rent Vs. Mortgage
Pending on the type of city you live in, the cost of mortgage and the amount of rent you pay can be determine by several things. Metropolitan cities like Chicago, New York, and San Francisco, your rent rate is going to be high regardless. In smaller cities like Charlotte, Indianapolis and Phoenix, your payout is going to be a lot cheaper and you will get more bang for your buck.
If you don’t know by now, the number 1 rule in real estate is location, location, and location! Here is a simple equation to help explain it all, prime location=higher rent and high mortgage.
Do you know anybody that will work for free? I ask this because most people I know want something in return for labor. You shouldn’t take this viewpoint when deciding between a mortgage and rent. When you are paying a rent to live somewhere, you will never get anything in return.
Pending on circumstances (economy, rent increase, etc.), you could see an increase in rent every year that you chose to live there. When you finally decide to move, you get nothing back but your security deposit.
This is not the case when you have a mortgage. Most loans that people qualify for will not show an increase in mortgage each year that you own the house. In fact, you should see a decrease. Meanwhile, the value of your property should be appreciating.
Ideally, you want your mortgage to decrease and value to increase every year. When you rent a place, you have no value in the property.
I have given you a lot of truths/opinions about which is better, paying a rent or mortgage. In the end, you have to do what’s best for you. There is an old saying; numbers don’t lie, so here are some numbers to help give you a better perspective.
These are some national numbers and some local numbers from the Chicago market (because this is where I do business). I gathered this information from a conversation with Zillow Marketing.
- In Chicago, rents actually dropped .5 percent from January 2014 to January 2015
- Chicago renters pay 31.1 percent of their income on rent each month, assuming the median income
- Homeowners pay 13.9 percent of their monthly income on mortgages
- Chicago permitted 906 new units for every 1,000 new residents from 2012 to 2013, according t0 Zillow (source: http://www.zillow.com/blog/newcomers-outpace-new-housing-172547/)
- The Breakeven Horizon shows renters should consider buying in Chicago if they plan to live there for 2.2 or more years (source: http://www.zillow.com/research/q4-2014-buy-rent-breakeven-9380/)
- The median home value in the US is $178,700. The market average for national mortgage (30 year fixed) is 3.52 percent. Assuming you put down 20 percent, or $35,740, you’re looking at a payment of $889 per month, comprised of $644 P&I, $179 in taxes and $67 in insurance. I came to this figure using our mortgage calculator: http://www.zillow.com/mortgage-calculator/
- The median rental price in the US is $1,355 – so you can already see the median mortgage is a lot cheaper nationwide. But, unlike renting, buying comes with more costs than the monthly mortgage payment. According to Zillow’s research, the breakeven horizon, or the point at which buying a home becomes less expensive than renting the same home (including down payment and all associated homeownership costs) is 1.9 years.
I hope you have enjoy the article, “Rent Vs. Mortgage: Which Of The Two Is Better??” Make sure yo subscribe to my newsletter to receive free real estate tips!