Finding independent housing is one of the first steps of “adulting”. Maybe you’re considering the possibility of relocating to a different city for a new job or finally moving out of your parent’s home, either way, your journey to find a home has begun. As you start the process, a question you need to consider is – do you rent or finance (take out a mortgage) your new home? Is renting a decision by those who like throwing their money away or is it a lifestyle choice? In this post, I am going to show you that renting is actually a better financial decision and no longer deserves the negative stigma of the past.
The American Dream
I do believe in the “American dream” with the white picket fence but sometimes the facade is not worth the financial expense. How do I know? Currently, my husband and I rent a home with our young family and we do so by choice after owning two homes and relocating to a different state for a new job. And to be honest, you don’t need to relocate out of the state. Think about if your job moved to the other side of the city and instead of a 15 minute commute you have a 1.5 hour commute each way. Would you want to stay in your house? We decided to rent rather than buy after learning more about the benefits of renting provides with increased flexibility and lower maintenance costs. Truly, if you have the financial funds to purchase a house with 100% cash then buying is almost always going to be better than renting – otherwise, you are just renting from the bank.
Homes rented or with a mortgage, are expensive as research indicates that 33% of one’s budget is towards monthly housing costs. With increased home prices and mortgage rates, studies show that those who decided to rent find they are positioned better financially than those choosing to purchase a home. A recent NerdWallet analysis found homeowners in all 50 states and Washington, D.C., pay from 33% to 93% more for housing each month than renters living in the same state. “Today only 41% of people live in a county where the median-income family can afford to buy a home at the median list price, and affordability declined significantly over the past year,” said Danielle Hale, realtor.com.
Now you may say, wait isn’t it more expensive to rent and are you not just throwing your money away? Part of the millennium culture is to change jobs or even careers several times within one’s lifetime. If you under the age of 40, chances are you have switched employers once, twice or maybe four times already. Additionally, it is possible that as you will make a career change or your job is transferred and you feel that it is a necessary to move. Unless you plan to live for five years or more in the same house, you will likely not break even on your mortgage. The reason? You are paying more in interest at the beginning of your home ownership. In general, less than 20% of your entire mortgage payment is actually being applied towards the principal or what you would consider savings for the first 5 years (we suggest 8 years at BrainyMoney). The remaining 80% is what we like to call your rental equivalent payment (REP) which is just like rent.
If building personal wealth is a personal goal, a study conducted by faculty at Florida Atlantic University, Florida International University, and the University of Wyoming study found that those who rent have the opportunity to build assets. Paying rent is not necessarily financial foolishness like in the past and is becoming a lifestyle decision. Nowadays, owning a home may cost you more due to: saving for a down payment; paying mortgage payments; the costs of buying and selling your home; appreciation along with maintenance. Have a roof that is leaking after a big storm? Renters can call someone to fix it while a homeowner will need to call a roofing company for an estimate, schedule an appointment, pay for the estimate and then find the thousands of dollars to pay the roofing company. Furthermore, there is a misconception that when buying your home, you own it which is not the case unless you pay 100 percent of the purchase price. Unless you have a trust fund – and if so, good for you – rarely does someone young has that much cash set aside for just a home purchase. With owning your home, you are renting it but not from a landlord, instead you renting your home from the bank.
To be fair, there are things to consider when renting such as having additional money for a deposit. However, a one month deposit (call it $3k on the high end) is nothing like 5% or 10% down on a house. Likewise, not all rentals are created equal and not all apartments or houses are rent controlled. There is the possibility of changing landlords or having your rent increased when it comes time to renew your lease. Unfortunately, you may even face discrimination and while illegal, it is one of the issues people deal with during their rental journey. Take time to review information on real estate websites like Zillow or Realtor to compare your estimated rent versus a mortgage payment for your new home.
There is also more flexibility in renting as you never know when you may receive a new job offer and being tied to a home could prohibit you from taking that next big step to advance your career. Truth be told, do what is best for you – renting or buying – as it will depend on your location and current financial situation. Just remember that financing a home is a lifestyle decision and not always a financially prudent one and that’s okay.
Why We Choose To Rent
For us though, at this point in our lives, renting is our preferred path. Our weekends are spent enjoying quality time with our children as we receive all the benefits in living in a home with none of the headaches managing the repairs.