Is Renting Now a Better Option Than Buying a Property?

It is currently more affordable to rent than to buy a home, according to reports you may have recently seen in the news. And while if you only look at average monthly payments, that might be true in some markets, the figures do not account for one thing, which is home equity. Here are some examples of the potential impact of equity and the reasons it should be taken into account when making a decision.

What the Headlines Are Based on

The graph below uses national data on the median rental payment from Realtor.com and median mortgage payment from the National Association of Realtors (NAR) to compare the two options. As the graph shows, especially if you’re not looking for a lot of space, it can be more affordable on a monthly basis to rent:

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However, if you are looking for a property with two bedrooms, the difference between the median mortgage payment and rent starts to get smaller and could be more manageable. The median monthly mortgage payment is $2,040. The average mortgage payment is $2,040 per month. That is a monthly difference of roughly $151. But this is what occurs when equity is also taken into account.

How Equity Changes the Game

If you rent, your monthly rental payments only go toward covering your housing costs and your landlord’s expenses. So other than saving a bit more per month and maybe getting your rental deposit back when you move, the money you spent on housing each month is gone – forever.

When you buy, your monthly mortgage payment pays for your shelter, but it also acts as an investment. That investment grows in the form of equity as you make your mortgage payment each month and chip away at what you owe on your home loan. Your equity gets an extra boost as home values climb – which they typically do.

To give you a clearer idea of how equity can really stack up fast, here’s some data for you. Each quarter, Fannie Mae and Pulsenomics publish the results of the Home Price Expectations Survey (HPES). It asks more than 100 economists, real estate professionals, and investment and market strategists what they think will happen with home prices. In the latest release, those experts say home prices are going to keep going up over the next five years.

Here's an example of how equity builds based on the projections from the HPES (see graph below):

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Assume you bought a $400,000 home at the beginning of this year. You most likely intend to stay in your new home for a while. According to HPES projections, if you live there for 5 years, your household wealth could increase by more than $83,000 as your home's value rises.

Here’s how that stacks up compared to renting, using the overall median rent from above:

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While you may save a bit on your monthly payments if you rent right now, you’ll also miss out on gaining equity.

So, what’s the big takeaway? Whether it makes more sense to rent or buy is going to vary based on your personal finances. It’s not a good idea to buy if the numbers truly don’t work for you. But, if you’re ready and able, adding equity as the final puzzle piece may be enough to help you realize buying is a better move in the long run.

Bottom Line

When it comes down to it, buying a home gives you a benefit that renting just can’t provide – and that’s the chance to gain equity. If you want to take advantage of long-term home price appreciation, let’s go over your options.

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