An Investopedia article written a couple of years ago suggesting that owning a home isn’t a good financial decision has been making the rounds on Facebook recently. A friend found it and forwarded to me, nervous that she and her husband had made the wrong decision in buying a house for their young family.
The article raises some good points about home ownership — it can be expensive, due to the cost of mortgage interest and the inevitable repairs that homeowners make on their properties over time. The tax savings that come from mortgage interest payments don’t make up for those expenses, either. So, is the conclusion of the article right — is renting a home really better than owning?
Not by a long shot. While there are certain times in life when you shouldn’t buy a home (if you have other debt, a lack of cash or unstable life circumstances), home ownership turns out to be the best financial option for most families today. Here are five reasons why:
1) Owning a home locks in your housing costs.
When you buy a home with a fixed-rate mortgage, you lock in the cost of housing your family for the life of the loan. The combined amount of principle and interest on your very last house payment will be the same as the total on your very first. As you go about managing your money throughout the course of your life, you can count on your housing costs staying the same, even as inflation causes the cost of everything else in your life to go up.
When you rent, though, you have none of this protection. As inflation drives up the cost of living, it also drives up the cost of rents. The amount of money that you have to pay for your apartment or townhouse ten years from now will be a lot more than you have to pay for the same space now. When you rent, your housing costs vary at the whim of market forces, which will cost you a lot more money over the course of your life than owning a similar property would have cost.
2) Home owners eventually eliminate housing payments.
The main thing that the author of this article left out of his equation (and that many typical Americans forget also), is that when you buy a home, you’ll eventually pay it off. Though it can take a long time (15 years if you’re wise, 30 years if you’re not), you’ll eventually pay through the entire term of your mortgage and eliminate the loan balance, which means that you own the property free and clear.
When that happens, you will have finished your series of locked-in housing payments and lowered the housing cost in your life to effectively zero. Because housing is often the largest single expense in any family budget, eliminating your monthly housing payments is a huge benefit. But it’s a benefit that renters never get — because renting only buys you housing for a month at a time, you’ll never reach the point where you don’t have to write that monthly check.
3) Homes appreciate in value.
In a normal real estate market, homes go up in value over time. (Yes, I know that the past few years have been difficult for a lot of homeowners, but these are abnormal times, and the market is quickly stabilizing and returning to normalcy.) Because of this, most people can expect to sell their homes for more than they paid for them, which means that they make some money on their transactions.
This appreciation of home values isn’t always a sure thing, of course, and it doesn’t make it a good idea to buy a home you can’t afford (or to flip houses or get into real estate speculation). What it does mean is that, while ownership does cost you some money in interest payments and repair costs, a fair amount of that money comes back to you in the form of appreciation when you eventually sell the home. This is a source of wealth growth that renters never get.
4) Home owners build equity and wealth.
It’s true that the cost of interest over the life of a loan means that you end up paying a lot more money for your home than the actual purchase price (although using 15-year mortgages reduces these expenses substantially). But each time you make a monthly mortgage payment, a good chunk of that money goes toward the principle of your loan, which builds the amount of equity that you have in the home.This makes your house a form of a bank — when you pay principle on your loan, you’re essentially depositing money into your house. Though you don’t have access to that money now, you will get it back when you sell the house.
Home owners build equity in their houses every time they make a mortgage payment, and over the course of a lifetime, that equity turns into significant wealth. Yes, a portion of their payment “goes up in smoke” in the form of interest to the bank, but that portion goes down over time. Renters, on the other hand, get no equity out of their transactions — their entire payments go up in smoke. At the end of a long life of renting, a renter has accumulated no wealth through housing.
5) Home owners control their housing futures.
Beyond all of the financial calculations, there are numerous intangible benefits of home ownership. One of the biggest is in the nature of ownership itself: When you own something, you control it. You make decisions about it, and you can’t be bossed around by others.
Home owners can stay in their houses as long as they want (barring extreme circumstances). They can have pets if they want. They can share their homes with 12 other people, or live their whole lives independently. But renters always have to play by someone else’s rules. And they have no real security about where they’ll be living — a property that you love renting could be sold tomorrow, and the new owner could throw you out once your lease expires, or jack the payments up to where you can’t afford them. When you rent, you live at the mercy of other people’s decisions.
As you can see, there are a ton of benefits, financial and otherwise, that come from owning a home. If you’re not ready to make the commitment of buying a house, that’s okay. But if you are, don’t let some nonsense article on the internet dissuade you from making a great decision that will pay off for you in big ways down the road.
Photo by Jenny Cu. Used under Creative Commons License.