Renting vs. Buying a House: How the Math of Falling Mortgages Could Surprise You
The Federal Reserve Board (the Fed) announced the first interest rate cut in September that it’s made in years, as inflation has finally begun to cool. This could sound like exciting news to homeowners who have been landed with higher-than-comfortable mortgage interest rates, allowing for the possibility of refinancing to cheaper rates.
While any rate drop offers the opportunity for refinancing, the rate drop might not manifest in the kinds of savings that make owning a house on par with renting at this stage of the game.
The Rate Drop Isn’t Huge
For one thing, The Fed’s rate drop was only half a percentage point, and considering how much rates have gone up in the last few years, unless you have a really big mortgage most homeowners will only see small savings if they were to refinance.
For example, according to the Wall Street Journal, the average rate on a 30-year mortgage only dropped to about 6% this week, which will not bring the average mortgage payment down to the U.S. average rent of around $1,840 per month.
In order for that to happen, 30-year fixed mortgages would need to hit around 5.25% for mortgages to be competitive with rents.
The Savings Could Add Up Over Time
While the current interest rates don’t make homeownership cheaper than, or even as affordable as renting, in most metros homeowners do save if they refinance over time. According to CBS, even a meager $107 per month savings could add up over time to nearly $40,000 in savings on the life of a 30-year fixed mortgage loan.
Location Affects Prices
Home values and prices can vary quite a bit from state to state, with certain regions tending toward lower prices, historically. In places that are more affordable, such as parts of the South and the Midwest, mortgage payments might be closer to rents.
GOBankingRates recently did a study looking at how much mortgage payments have increased through all 50 states and found that states with the lowest increases in mortgage payments over the past decade included Alaska, Louisiana and North Dakota.
Renting Is Cheaper Upfront
There’s no doubt that renting is generally cheaper than owning — as much as 60% cheaper — not only because rents generally remain below mortgages, but you’re not typically paying things like property taxes or maintenance on a rental either.
There Are Still Advantages To Owning
That said, your monthly payment is not the only thing to think about when considering whether to buy or rent. For one thing, the Fed has signaled the possibility of additional rate cuts, and eventually there will come a time when rates fall further, making refinancing worthwhile.
Owning a home also comes with the benefit of earning equity as your home value appreciates, which can then be tapped for things like a home equity loan, or even as cash in hand if you sell the home. While renting often requires less of a commitment, the money you put toward a mortgage is going back into the value of your home.
That said, keep an eye on the Fed’s future rate cuts. By the time there’s an entire percentage point drop, the savings can be much more significant.
Jordan Rosenfeld Sat, October 12, 2024
The Advantages of Purchasing a Home Over Renting
The Advantages of Purchasing a Home Over Renting
Deciding whether to buy a home or continue renting is a significant financial decision that many people face at some point in their lives. While both options have their pros and cons, purchasing a home offers several distinct advantages that can provide long-term benefits. In this blog post, we will explore the advantages of buying a home over renting.
1. Building Equity
One of the most significant benefits of owning a home is the ability to build equity. Equity is the portion of your property that you truly “own” and increases as you pay down your mortgage. While renters pay monthly rent fees that contribute to their landlord’s equity, homeowners pay mortgage payments that increase their own net worth. Over time, the equity accumulated can be substantial, providing homeowners with greater financial stability and opportunities for investment.
2. Potential for Property Appreciation
Real estate has historically appreciated in value over the long term. When you purchase a home, you are investing in an asset that may increase in value over time. This potential appreciation can offer significant financial gains if the property is sold at a higher price in the future. While property markets can fluctuate, owning a home generally offers a stable and potentially lucrative investment opportunity.
3. Tax Benefits
Homeownership comes with various tax benefits that can make a significant difference in your annual tax bill. Mortgage interest and property taxes are often deductible on your federal income tax return, lowering your taxable income and potentially saving you thousands of dollars each year. Furthermore, some states offer additional tax advantages to homeowners, making it even more financially favorable.
4. Stability and Control
When you own your home, you have a stable living situation that you can control. Homeowners are not subject to rent increases, lease renewals, or the risk of eviction, unlike renters. This stability allows for long-term planning and the freedom to customize your living space to your liking. From renovating rooms to landscaping the yard, you have the autonomy to create a home that fits your personal style and needs.
5. Sense of Community
Owning a home often fosters a stronger sense of community and belonging. Homeowners tend to stay in their properties longer than renters, leading to more stable neighborhoods where residents form lasting relationships. This stability can contribute to a strong sense of community, increased neighborhood safety, and greater involvement in local activities and decision-making.
6. Long-term Financial Benefits
Though purchasing a home requires substantial upfront costs, such as a down payment and closing fees, the long-term financial benefits often outweigh these initial expenses. Homeownership allows individuals to build wealth over time through equity accumulation and property appreciation. Additionally, fixed-rate mortgages provide predictable housing costs, unlike renting, where rent payments can increase annually.
In conclusion, while renting may offer flexibility and require less upfront financial commitment, purchasing a home provides numerous advantages that can lead to greater financial security and personal satisfaction. From building equity and enjoying tax benefits to achieving stability and a sense of community, homeownership is a valuable investment that can enhance your quality of life.
