This is a debate that has been ongoing for years, but seemed to be in the news more often after the “Mortgage Meltdown” of 2008. Jonathan Smoke an Economist for Realtor.com put together a great piece in Feb of this year. I’ve linked to the article at the bottom, and here are some highlights.
>There’s about $13.1 trillion stashed away in the United States, in plain sight. Where? In our homes! And that works out to almost $175,000 per owning household.
>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.
>A mortgage payment 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.
>Here’s how that works out for a median-price home of $250,000 bought in January with 20% down with a monthly payment of $976.Before their first payment, the proud new homeowners had $50,000 in equity thanks to their down payment. (Actually, 20% down isn’t always typical or necessary, but, hey, it keeps this illustration simple.) In the first year, an average of 29% of the monthly payments builds equity. After 12 payments, the homeowners have just over $3,400 in added equity. By year 14, 50% of the monthly $976 payment goes toward equity. Don’t forget that the monthly payment hasn’t changed, because the interest rate was fixed. At the end of the 14th year, just shy of $64,000 has been added to the initial $50,000 in equity. In the final year of the 30-year mortgage, while the monthly payment remains $976, 98% of the monthly payments builds equity until that magic day when the home is owned free and clear.
>So, you want a better rent versus buy illustration? First, find a place to rent for no more than $976—the same as our mortgage payment example above. If you can rent for less, great. Will you be able to save that difference amounting to at least $3,400 in the first year? That would imply you can really pay only about $700 in rent to get the same savings effect. If you can’t save $3,400 yourself by paying less in rent, ask the landlord if he’ll take a portion of your rent payments and set it aside for your rainy day fund. Then ask the landlord if he’ll set your rent payment at today’s rate for the next 30 years. And before you close the deal, ask him to raise the rainy day share each year by 1% to 2% until year 30, when he’ll get only 2% of the rent payment.
Some interesting points made by Jonathan, and hard to find fault with his findings!!
