By Mary Hunt
There used to be no doubt that buying a home was considered better than renting. Everyone, it seemed, from your wise parents to your friendly neighborhood banker advised that renting a home was tantamount to throwing your money away. Owning provided a way to “put your money to work.”
Then home prices began to surge. Huge purchase prices and the requirement of at least 20 percent for a down payment squeezed lots of people out of the market. Wisdom then suggested it was better to rent and invest that money you didn’t spend on a down payment and big monthly interest payments to your mortgage holder.
Things changed again when “nothing-down” mortgages became the latest and greatest and lenders loosened the requirements to get home loans. Suddenly, anyone with a pulse and a signature could buy any home he wanted. Given the fact that homebuyers had the options of interest-only and adjustable-rate mortgages, renting a home became the expensive way to go.
Now that home prices have dropped significantly in many areas and banks and home mortgage lenders are back to requiring borrowers to qualify for loans, is it better to buy or rent?
A recent story in The New York Times set out to answer that question. Using something called the “rent ratio,” the writers concluded that if you stay in your home for seven years, buying is better. If you move around a lot, it’s cheaper to rent. The methodology to reach this conclusion was extensive, but in summary it says that after seven years, the cost of buying drops off, resulting in an average savings of $759 per year over renting.
Here’s how the rent ratio works: Take the price of a home you are likely to buy. Divide the price by 20. Compare the result with the annual rent on a comparable home. If the result is higher than the annual rent, renting is probably a better deal. A quick example: $500,000 divided by 20 is $25,000. So if the annual rent you would pay is less than $25,000 (roughly $2,100 per month), there’s a good chance you’re better off renting.
Though I understand the reasoning and math behind this kind of thinking and advice, the mathematical approach misses something really big, in my opinion. When you buy a home with a fixed-rate mortgage, those monthly payments do not go on forever. At the least, you should be done in 15 years, and at the most, you should be done in 30. By “done,” I mean you pay off the mortgage. We’re talking you have 100 percent equity. You own your home free and clear.
If you happen to move in that period of time, you simply carry the equity with you into the second or third home in the form of an ever-increasing down payment. Why do so many people miss this important feature of a home mortgage, looking only at the monthly outlay?
Paying off one’s home mortgage means a rent-free retirement. Renting a home means renting forever.
Mary Hunt is the founder of www.DebtProofLiving.com and author of 18 books, including her latest, “Can I Pay My Credit Card Bill With a Credit Card?” You can e-mail her at firstname.lastname@example.org, or write to Everyday Cheapskate, P.O. Box 2135, Paramount, CA 90723. To find out more about Mary Hunt and read her past columns, please visit the Creators Syndicate Web page at www.creators.com.
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