A lesson I learned many years ago was that it’s always better to buy a home and make mortgage payments, as opposed to paying rent. In both cases you’re making a monthly payment but when you’re making a mortgage payment you’re building equity ownership in your home, whereas if you’re paying rent that money is going to the homeowner, you’re helping them pay their mortgage and generating rental income for them. Either way a rental payment doesn't give you any future benefits.
I haven’t had a mortgage or rental payment for many years, but I was reminded of this financial rule of thumb a couple of years ago when my son was looking for his next place to live. He was living in a place for three years as a university student and then another two years as he entered the workplace. He realized it was time for him to move when his neighbours were partying at 2AM on a Tuesday night. He was living in student housing, which was fine when he was a student, not much now when he had to be in the office at 8:30, Monday to Friday.
He started looking for apartments to rent and realized rent in the real world was quite a bit higher than in student neighbourhoods. When we saw what the going rental rates were we realized that a mortgage would probably cost him the same on a monthly basis, and as stated above it’s always better to pay for a mortgage on a home you own, than to pay rent.
If it were as easy as that, everyone would buy instead of renting; the tricky part is coming up with a reasonable down payment and qualifying for a mortgage from a bank.
My son had a decent nest egg saved up, but he agreed that it would be best to move home, live with us for about a year and save up even more money for a larger downpayment on a home purchase. Again the lesson at play here was that if he was going to pay a lot in rent for a decent home, he might as well be paying the mortgage on a home he owed instead. Near the end of that year of living at home he talked to his bank about a mortgage. He was qualified for the mortgage he needed and did so without any help from his parents (a proud parental moment indeed). He also saved a lot of extra money and that was used for his down payment, so his return home was successful and worth the sacrifices we all made (returning to live at home after living away from your parents for five years is not easy).
In my son's case everything worked out and the buy vs. rent lesson was successfully applied. Again it’s not as easy as it sounds which is why many people rent their homes when they are young and first starting out. In my son’s case he had a good-paying job demonstrating to the bank that he could afford to make the monthly mortgage payments on the principal amount of the mortgage he was seeking. Not everyone may be in this situation. The other thing my son had in his favour is that he worked while in school and was good at saving most of that money he earned. As a result he had a sizeable nest egg saved up to use for the down payment. This is important as the larger the down payment the less you have to borrow from the bank for the mortgage, and thus the lower the monthly mortgage payments. This is another part of this buy vs. rent decision. You don’t want to be in a situation where your mortgage payment consumes most of your monthly cash flow. You still have to eat, pay operating costs on your home (heat, electricity, water), and have some money left over for leisure activities. While the same principles apply to paying rent (i.e. you have to be able to afford the rent payments), the difference is buying a home and taking responsibility for the mortgage is a longer term commitment, and very difficult to get out of. If your rent turns out to be too much to manage you move elsewhere fairly easily. It’s not as easy to get out from under a mortgage you can’t afford.
I’m a big advocate for young adults to begin saving as much as possible of their income earned from their jobs. Part of my motivation for advising young adults this way is to have them get an early start on their retirement savings, but the other motivation is to make sure they save up for intermediate spending like a home purchase. Buying vs. renting is no brainer but you have to have the money for a decent downpayment.
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