|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
Mortgage Myths: It's Cheaper to Rent than to Own
One of the more newsworthy housing trends in 2017 was the revelation that the vast majority of the millennial population said they prefer renting to owning. When asked why a large percentage said that owning was not an option because they don’t make enough money and that it was cheaper to rent than to own a home. However, in many areas of the country, if you can afford to rent, you can afford to buy. According to a survey by GoBankingRates.com, renting is more expensive than owning a home in 42 states.
It’s Apples and Oranges
Taking a short-sighted view, you can make an argument that renting is cheaper than buying a home. But, when you consider that you have to live somewhere long into the future, owning is almost always cheaper than renting, especially if you live in the same home for more than a few of years. The big mistake people make is to reduce the comparison to apples-to-apples based on monthly costs alone. In doing so, they’re missing the point. Yes, renting a home may require a little less out of pocket initially; however, within just a few years, the only person making out on the deal is the landlord.
Mortgages are not as expensive as you might think. In fact, according to GOBankRates.com, monthly mortgage payments are cheaper than rent payments in 42 states. Granted, the comparison doesn’t include additional costs, of maintenance, property taxes and homeowner’s insurance. However, when you consider that the national average rent is increasing by 4% a year, you could be paying the equivalent of those added costs within a couple of years. When you own a home, all of your costs except maintenance are essentially locked in for the duration of your loan.
Renting isn’t Getting Any Cheaper
Taking the long view, you will also want to consider that, according to Zillow, the cost of rent grew twice as fast as household income over the last 15 years, which pushed housing costs up to 30% of the average renter’s income. It’s recommended that your housing costs don’t exceed more than 25% of your income, which is easier to achieve when you are able to deduct your mortgage payments from your taxes.
Rent payments are expected to continue their current trajectory, which will only make renting more expensive. Although housing prices are expected to increase as well, your actual cost of housing can be frozen in time once you buy. With mortgage rates still hovering near the historic lows, there may be no better time to lock in those costs.
It’s difficult to catch up to the rising cost of housing, which is why now is the best time to convert your rent payment into a mortgage payment, even if you have to start out with a smaller home. If you look at home ownership as a long-term strategy, your first home is just a stepping stone to your dream home which is paid for in part from the equity in the homes you buy along the way.
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