You may have seen reports in the news recently saying it’s more affordable to rent right now than to buy a home. At the same time, that may be true in some markets, if you look at typical monthly payments. Home equity is one thing that the numbers aren’t factoring in.
Here’s a look at equity’s significant impact and why it’s worth considering.
What the Headlines Are Based on
The graph below compares the two options using national data on the median rental payment from Realtor.com and the median mortgage payment from the National Association of Realtors (NAR). As the graph shows, renting can be more affordable monthly, especially if you’re not looking for much space.
(View Our Graph – February 2024 Rental Report)
But if you’re looking for something with two bedrooms, the gap between the median rent and the median mortgage payment starts to shrink to a difference that may be more doable. The median monthly mortgage payment is $2,040. The median monthly rent for two bedrooms is $1,889. That’s a difference of about $151 a month. But here’s what happens when you factor in equity.
How Equity Changes the Game
Your monthly rental payments only cover your housing and landlord expenses if you rent. So, other than saving a bit more per month and maybe getting your rental deposit back when you move, the money you spend on housing each month is gone forever.
When you buy a home, your monthly mortgage payment pays for your shelter, which also acts as an investment. That investment grows in equity as you make your monthly mortgage payment and chip away at what you owe on your home loan. Your equity gets an extra boost as home values climb, which they typically do.
Here’s some data to give you a clearer idea of how equity can stack quickly. Fannie Mae and Pulsenomics publish the Home Price Expectations Survey (HPES) results each quarter.
What They Say: Survey Findings
The survey asked more than 100 economists, real estate professionals, and investment and market strategists what they thought would happen with home prices.
In the latest release, those experts say home prices will keep increasing over the next five years. Here’s an example of how equity builds based on the projections from the HPES (see graph now).
Imagine you purchased a home for $400,000 (new listings) at the start of this year. And, plan to stay put for a while. Based on the HPES projections, if you live there for 5 years, you could gain over $83,000 in household wealth. Your home will grow in value over time.
Here’s how that stacks up compared to renting, using the overall median rent from above.
[The Benefits of Buying a Home]
While renting now may save you a bit on your monthly payments, you’ll also miss out on gaining equity.
So, what’s the big takeaway? Whether it makes more sense to rent or buy depends on your finances. It’s not a good idea to buy if the numbers truly don’t work for you. But if you’re ready and able, adding equity as the final puzzle piece may be enough to help you realize buying is a better move in the long run.
Expert Insight: Is It Better to Rent or Buy?
When it comes down to it, buying a home gives you a benefit that renting can’t provide. And that’s the chance to gain equity.
If you want to take advantage of long-term home price appreciation, let’s review your options with trusted agents in your area.
