Buy or Rent a Home: Which Option Makes You Richer?
Buying a home can be a great financial move, but there’s no guarantee that you’ll always come out ahead. Renting can also be a smart way to build wealth, if you follow a few guidelines. Laura covers the pros and cons for owning and renting so you know which option will make you richer.
4. Paying less per month (in some areas).
Another way buying a home can make you rich is borrowing at a historically low rate. A 30-year fixed-rate mortgage currently costs less than 4.5% APR. Getting a $200,000 loan at that rate makes your monthly payment about $1,000.
Low interest rates can make owning a home cheaper than renting, even with additional costs such as homeowner’s insurance and property taxes. Of course, that isn’t true in large cities, such as New York or San Francisco where home prices are notoriously high.
And speaking of high prices, an often-overlooked benefit of owning a home is that it’s a hedge against inflation, when you have a fixed-rate mortgage. That’s because your payment is locked in for the term of your loan, such as 15 or 30 years, no matter what happens to interest rates or the economy.
Rents may increase during periods of inflation, but a fixed mortgage can’t go up. Owning a comparable home becomes more affordable when prices rise. If you use your additional discretionary income wisely, that can help you grow rich.
How Can Renting a Home Make You Richer?
Places to rent come in all shapes and sizes, from single-family country houses to high-rise studio apartments in the city. There are landlords and management companies offering rentals no matter where you want to live.
One pro for renting is not having many upfront expenses.
Here are four ways signing a lease instead of a mortgage can make you richer.
1. Having flexibility.
Having the flexibility to relocate for work or family needs is an often-overlooked benefit of renting. Landlords typically require a 12-month lease, but you may also have the option to get a shorter term or to pay month to month.
Being able to pick up and go for your company or to take a higher-paying job could go a long way toward making you richer. But if you’re a homeowner and want to pull stakes, you’re usually stuck until you sell the property or find a reliable tenant to help you pay the mortgage.
2. Paying less upfront.
Another pro for renting is not having many upfront expenses. You typically must pay a security deposit for potential damages, which could be equal to a month or two of rent. That’s much less than having to fork over a down payment for a home, which is usually at least 3% of the purchase price.
You also need to make an earnest money deposit with your purchase offer and pay closing costs. Plus, the cost to furnish a rental can be less expensive than a home, if the square footage is smaller.
Keeping more of your cash may allow you to invest more and to begin growing a nest egg earlier than you could as a homeowner.