Which is better: a mortgage payment or a rent payment?
Many will argue that it’s a waste of money to rent when you could be making house payments instead. Others will say it’s cheaper to rent than to make mortgage payments. There are pros and cons to both, but here are three major benefits that mortgage payments have over rent.
1. Mortgage Payments Can Grow Your Wealth
Homeownership helps grow your wealth. When you make your monthly mortgage payments, you build equity (assets – liabilities = equity) in your home.
That’s different from paying rent. When you pay rent, you’re not getting any long-term benefits in exchange for it (except, of course, another month in your residence).
However, it’s important to note that owning a home isn’t automatically a better way to build wealth than renting.
“While it’s true that when you make a mortgage payment you’re accumulating some equity in your home, if you don’t stay very long, your initial payments, the first several years, mostly go to interest, so you’re not actually building that much equity,” personal finance author Jane Hodges says.
Therefore, when deciding whether a mortgage or rent payments are the smartest financial move for you, make sure you take into account how long you plan to stay in that home.
Related: Mortgage 101: A Beginner’s Guide
Is Renting Cheaper Than Buying a Home?
It depends. If you secure the right interest rate, it could be that you would end up paying less over a set amount of time than you would for a rental of equivalent value over that same period. And, at the end of that period, you would have your own home to show for your efforts.
Of course, in many areas rent has remained relatively low while home prices and interest rates have risen. So, to determine which would be cheaper for you, you’ll need to compare what you’re currently paying for rent with what you would be paying for a mortgage.
Related: Is a House Still a Good Investment?
2. Owning a Home Can Offer Financial (and Personal) Stability
There’s a certain amount of permanence to owning a home. Yes, you could decide to sell five or ten years down the road, but it’s not as easy as renting a new place.
That stability often translates to social, health, and community benefits for you (and your family). It provides a sense of security and safety.
Renting, on the other hand, comes with more flexibility. That can be a good thing if you aren’t settled in an area yet, but it can also mean uncertainty. When you rent, a landlord could raise your monthly payments or ask you to move before you wish.
With mortgages, there are no surprises. Your terms and interests rates are all spelled out for you.
3. You Can Take Tax Deductions for Mortgage Payments
Tax deductions are another way in which mortgage payments are better than rent payments. When tax season comes, homeowners can take advantage of mortgage interest deductions.
According to the experts at TurboTax, “deductible mortgage interest is any interest you pay on a loan secured by a main home or second home that was used to buy, build, or substantially improve your home.”
Examples of loans that would fall in this category include:
- A mortgage to buy your home
- A second mortgage
- A line of credit
- A home equity loan
Rent payments, by contrast, do not usually come with any tax perks.
“Unfortunately, renters cannot deduct rent payments from your federal return,” writes the TaxSlayer blog team. “The property owner has it better off when it comes to the tax benefits of rental property.”
There are some instances where renters could qualify for a deduction, such as if they work from home or pay property taxes as part of their lease. However, rental payments themselves are not tax deductible for federal returns.
Please note: taxes are constantly changing. While this blog is meant to help you best manage your finances, it’s for informational purposes only and shouldn’t be seen as tax advice. Talk to your tax professional if you have questions about your taxes.
Reasons Why NOT to Buy
Of course, buying a home isn’t the best option for everyone. Depending on your situation, renting may actually be better than buying a home.
For example, if you’re just starting your career and may move in the next few years, it might not make sense to purchase a home. If you have bad credit or don’t have enough funds for a down payment, now may not be the right time. And that’s okay — renting can come with benefits, too (little to no maintenance, more flexibility, etc.).
However, if you’d like to one day own a home, there’s no better time than the present to start preparing.
With that in mind, here are a few resources to help you improve your credit and build your savings:
And, of course, you can always count on Mercer Savings Bank to help guide you on your journey to becoming a homeowner. If you have any questions about mortgages, call or visit us and we’ll be happy to help.