Rent or Buy? Matching Your Goals with Your Lifestyle

The decision to rent or buy often centers on the concept of ownership. Many individuals, especially those who are entering their adult life or starting a family, consider buying a home the responsible action to take. However, making the decision to rent or buy is a financial decision, not just a personal decision. Factoring in the expense of either option, in both the short run and the long run, is essential to making the right choice.

Equity versus Expense

One of the key arguments to buying over renting is building equity. When a renter makes a monthly payment, that individual is essentially paying the mortgage on a property owned by another person. The check is cut, and the renter earns the right to remain in the property for one more month. This is the only benefit from the rental amount. When a homeowner writes a mortgage check each month, that money is placed against the principal owed on the home. It is converted into home equity and can later become earnings when the home is sold. It is an investment rather than an expense. In the long run, paying down a mortgage will also lead to a life without a monthly expense for housing.

Affording a Mortgage

Depending on the time of a mortgage application, the credit of the applicant, the down payment available and the geographical area of a home's purchase, a mortgage can be either more or less affordable than rent. For an individual or family living in a low rent area, mortgage will almost always be costlier than rent. This expense goes up if the homeowner has low income or a low down payment. A renter currently living in a high-rent area, such as a major metropolitan area, can often save money in monthly mortgage compared to rental cost. In these zones, however, the cost of homes is often high enough to present a major barrier to entry.

Length of Ownership

The first few years a homeowner is paying a mortgage, that individual is essentially paying off some of the interest on the home. Building any significant amount of equity takes time. The longer a homeowner is in a property, the more equity accumulates, and the more the home's value should ideally rise. If a buyer expects to be in a residence at least 10 years on a 30-year mortgage, purchasing a home will almost always result in a profit. In less than five years, however, an individual may only break even or net a loss on the home's purchase, making rent a better option in most cases.

Comparable Costs

A house is, ultimately, an investment. It is a wise investment only if it outperforms other investment options. Consider evaluating current rates of return on popular mutual funds, bonds and other investments. If the money allocated toward the purchase of a home would perform far better in these markets, accounting for the cost of renting during the same period, home ownership at this time is not the best investment. Ask your financial adviser to help you with this model.