If you’re weighing the pros and cons of buying a new home, monthly cost is likely a big factor. But if you’re only considering and comparing the total monthly costs to renting, you may be leaving out a big piece of the equation. Jonathan Smoke for Realtor.com explains the math for the rent vs. buy calculations.
There’s about $13.1 trillion stashed away in the United States, in plain sight. Where? In our homes!
Do we have your attention yet?
That’s the total value of the equity held by over 75 million U.S. homeowners, according to the latest estimates from the Federal Reserve Board. And that works out to almost $175,000 per owning household.
This is unmistakable evidence that homeownership is a critical building block of household wealth. Owning a home is a key reason why the median net worth of a homeowner is almost $200,000 while the median net worth of a renting household is just over $5,000.
Sure, part of that is because owners were able to pony up a chunk of money to put down on a house, and to qualify for a mortgage. But the act of paying for a mortgage actually helps produce more wealth, by freezing payment amounts and building equity through forced savings.
A 30-year amortized, fixed-rate mortgage is a beautiful thing. It provides an affordable path to buying a home while locking in today’s cost of that home for the life of the loan.
The traditional rent versus buy argument compares the total monthly costs of buying a home with a mortgage with the corresponding rent. So that comparison is relevant when it comes to representing the housing choice trade-off in clear cost terms.
Two years ago, that head-to-head heavily favored buying, thanks to very low mortgage rates and lower prices. Back then, more than three-quarters of the counties in the country saw lower buying costs than renting costs.
With prices and rates higher now, less than half of the counties in the country see math that favors buying.
But those raw numbers hide the fact that unlike a rent check, a percentage of every monthly mortgage payment—after the lender is paid interest—goes toward the owner’s home equity. That means it’s really a forced savings plan.
Over time, less of the mortgage payments go toward interest and more go toward equity, so the savings power is enhanced further.
Read the full article: The Misleading Math Behind the Rent vs. Buy Calculation | realtor.com®