Still renting? It adds up.
It’s an age-old quandary that millions of Americans confront every year: Should I rent or should I buy a home? It’s not always easy to decide.
The choice of whether to own a home or to rent is subject to much debate, and people on both sides of the argument have plenty of reasons why their decision is the right one. We have to assume that the primary driver is financial, and that those who propose renting a house, condominium or apartment think that renting is simply the cheaper way to go, at least for now. Are they right?
Renting vs. owning: Reality check
If you’re just starting out in life as an adult, renting makes a ton of sense. After all, you need time to build up credit, save money for a down payment and get serious about making monthly mortgage payments. But for everyone else, the case can be made that renting a home doesn’t add up in the short term or the long term.
In today’s economy, you might be surprised to learn that owning a home can save you money1 right now and over time. Here are some key reasons you might want to hold off on signing that rental lease and look into buying a home.
The zero-equity truth of renting
When looking for a place to live, it’s easy to be swayed by the lure of plunking down a modest security deposit and first-month’s rent. Problem solved, right? There are no interest rates to worry about, the transaction is not particularly complex or time-consuming and there’s really nothing that will leave you in suspense beyond a routine credit and employment check. It’s straightforward and simple. To many home-hunters, it has appeal.
But here’s the thing: While you may be saving money upfront by forgoing a serious down payment and sidestepping a monthly mortgage, you aren’t doing anything to build equity. And without building equity, you’re just treading water financially.
Buying a home and building equity
In simple terms, equity is the difference between the fair value of your home and what you owe on your mortgage. If your house cost $300,000, you put 20% down ($60,000) and have paid back $20,000, your equity is $80,000.2
But of course, equity isn’t strictly about the sticker price of your home; it’s about how much it’s worth in the marketplace today. That means a professional will need to evaluate your home and issue an appraisal. And as we know, a home’s worth can rise and fall depending on the state of the marketplace.
This affects your equity, too. But there’s no option for equity when you’re a renter unless you’re talking about building up your landlord’s equity. Yes, your monthly rental payments help increase your landlord's equity but do nothing to establish your own.
As you can see below, if you’re a renter, this is how much you may be paying toward your landlord's mortgage.
Rent / mo. ($) | 3 Yrs. ($) | 10 Yrs. ($) | 15 Yrs. ($) | 30 Yrs. ($) |
1,800 | 64,800 | 216,000 | 324,000 | 648,000 |
2,000 | 72,000 | 240,000 | 360,000 | 720,000 |
2,200 | 79,200 | 264,000 | 396,000 | 792,000 |
2,400 | 86,400 | 288,000 | 432,000 | 864,000 |
2,600 | 93,600 | 312,000 | 468,000 | 936,000 |
2,800 | 100,800 | 336,000 | 504,000 | 1,008,000 |
3,000 | 108,000 | 360,000 | 540,000 | 1,080,000 |
3,200 | 115,200 | 384,000 | 576,000 | 1,152,000 |
3,400 | 122,400 | 408,000 | 612,000 | 1,224,000 |
3,600 | 129,600 | 432,000 | 648,000 | 1,296,000 |
3,800 | 136,800 | 456,000 | 684,000 | 1,368,000 |
4,000 | 144,000 | 480,000 | 720,000 | 1,440,000 |
Renting vs. owning: Calculator
Need a more granular comparison? We also offer a customizable Rent vs. Buy Calculator that helps provide a personalized data-driven snapshot of the money you will likely spend over the course of owning a home vs. renting one.
Beyond equity: Other advantages of owning a home vs. renting
Equity isn’t the only reason owning a home may be advantageous. There are a number of compelling reasons to consider taking the plunge of homeownership rather than continuing to rent.
- Potential tax benefits accorded to homeowners3
- You aren’t captive to a landlord who can suddenly raise your rent
- You can decorate/renovate your home any way you choose
Potential tax benefits accorded to homeowners
There are some interesting tax-related reasons to purchase a home. While it’s recommended that you always check with irs.gov and your state for the most up-to-date information, we’ve highlighted some of the more prominent tax breaks below.
- Property taxes: You can deduct real estate taxes paid on your home up to $40,000 at the federal level ($20,000 if married filing separately). Some states may allow you to deduct the full amount.
- Mortgage interest: Homeowners are allowed to deduct home mortgage interest on the first $750,000, or $1 million if the mortgage was secured before Dec. 16, 2017.
- Deductions on home improvements: Major home improvement repairs can be used to decrease gains you may assume when you sell your house, but that’s down the road. In the shorter term, should those repairs be financed through a home equity line of credit, a home refinance or other loan, you may be eligible for deductions. Additional federal tax deductions also are available for energy efficiency modifications to your home. Your state may offer similar tax breaks.
- Capital gains: If you meet certain federal requirements, the first $250,000 of profit ($500,000 if married and filing jointly) is exempt from capital gains tax when you sell your home. This means the vast majority of homeowners get to reap the full financial benefits of having the price of the home appreciate over time.
- Income from rent: It may not be the first thing you’re concerned with when you buy a home, but at some point, you might rent out your home. If that’s the case, you can claim real estate taxes and mortgage interest as a deduction. You can also deduct your home insurance and any money spent on repairs.
You aren’t captive to a landlord who can suddenly raise your rent
Besides not enjoying the tax-related or equity-building benefits of homeownership, there’s another harsh reality that renters must face: They have zero control over increases in their rent.
When you sign a lease with your landlord, you’re only locking in the monthly rent on your unit for a limited period of time, typically 12 months. After that, should you choose to renew your lease, your landlord can decide to raise the rent, sometimes quite dramatically.
If you haven’t looked around for alternative accommodations, you might be stuck at the last minute signing a lease for another year at a price point beyond your comfort level. And as bad as that sounds, the following year could result in yet another rent increase. That’s the unpredictable nature of renting and another reason homeownership puts you in the driver’s seat: greater control over your financial well-being.
You can decorate/renovate your home any way you choose
Exercising the full privileges of homeownership means having the right to determine how your home looks, both inside and outside. That’s a beautiful thing, and it’s not something extended to renters.
When you rent a house or an apartment, you’re essentially a long-term visitor. In a sense, you’re a glorified guest in your own home, never fully rewarded with the right to redo the kitchen, add a skylight or construct an outdoor patio, all things homeowners undertake regularly with great panache.
Even seemingly uncontroversial activities such as painting your kitchen or family room a color other than white can sometimes sound alarms with strict landlords. On top of that, there are a host of hidden fees that can inflate the cost of renting. These aren’t discussed a lot, but they’re there in the fine print and can sour the renting experience very quickly.
All in all, renters need to think long and hard whether answering to a landlord is impinging on their lifestyle and shrinking their dreams. While the financial component will always loom large, you also need to think about the opportunity cost of staying too long in an apartment or neighborhood that no longer suits who you’ve become and where you want to go. For many Americans, homeownership is where dreams take seed.
You may not think you need to remodel that kitchen today, but wouldn’t it be nice to know you could if you wanted to? That’s homeownership; it unlocks choices well beyond equity or intergenerational wealth. It allows you to participate in the American dream on your terms.
1Savings, if any, vary based on the consumer’s credit profile, interest rate availability, and other factors. Contact Rate for current rates. Restrictions apply.
2Sample provided for illustration purposes only and is not intended to provide mortgage or other financial advice specific to the circumstances of any individual and should not be relied upon in that regard. Rate cannot predict where rates will be in the future.
3Rate does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Rate for current rates and for more information.
All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Rate does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Rate Rate its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action. Rate does not provide tax advice. Please contact your tax adviser for any tax related questions.
