Look Beyond the Monthly Payment
Is it better to rent or buy a home? The answer starts with your budget, but it should not stop at the monthly payment.
In some markets, renting can be more affordable than buying when you compare typical monthly payments. That difference matters. If buying does not work for your personal finances, the possibility of building equity is not a reason to force it.
But a payment comparison leaves out an important part of homeownership: the opportunity to build home equity. To make a useful comparison, look at both what you would pay each month and what owning could mean for your finances over time.
What Rent and Mortgage Comparisons Show
The original comparison used national data on median rental payments from Realtor.com and median mortgage payments from the National Association of Realtors, or NAR.
Those figures showed that renting could be more affordable on a monthly basis, particularly for someone who did not need much space. For a two-bedroom rental, however, the gap between the median rent and the median mortgage payment narrowed.
Here are the figures used in that comparison:
- Median monthly mortgage payment: $2,040.
- Median monthly rent for two bedrooms: $1,889.
- Difference: about $151 per month.
These are the figures from the original example, not a statement of what you would pay for a rental or home purchase. Use them to understand the comparison, rather than as a price estimate for your own decision.
For someone considering a two-bedroom rental, that example makes the question more specific: would the additional $151 per month be manageable? For some households, that difference may be doable. For others, it may not.
The lower monthly payment deserves attention. So does what each payment accomplishes.
What Your Housing Payment Does
When You Rent
Your rent pays for your housing and helps cover your landlord’s expenses. It does not build home equity for you.
If renting costs less each month, you may be able to save the difference. You may also get your rental deposit back when you move. But the money paid in rent has covered your housing costs, rather than built an ownership stake in the property.
That does not make renting the wrong choice. It means the benefit in this comparison is a potentially lower monthly payment, not equity in the home.
When You Buy
A mortgage payment also pays for shelter. But as you pay down what you owe on your home loan, you build equity. In that way, buying can also act as an investment.
Your equity can get an additional boost when the home increases in value. Home values typically rise over time, which is why appreciation belongs in a long-term rent-versus-buy conversation.
There are two parts to keep separate: equity built by paying down your loan and equity gained through an increase in the home’s value. The appreciation example below focuses on the second part.
How Appreciation Can Change the Comparison
To illustrate the potential impact of appreciation, the original article used projections from the Home Price Expectations Survey, or HPES.
Fannie Mae and Pulsenomics publish the survey results each quarter. The survey asks more than 100 economists, real estate professionals, and investment and market strategists what they expect to happen with home prices.
The survey release used in the original example projected that home prices would continue rising over the following five years. That was a forecast, not a guaranteed outcome.
A $400,000 Home Example
Imagine purchasing a home for $400,000 and staying there for five years. Based on the HPES projections used in the original article, that home could gain more than $83,000 in value over that period, adding to household wealth.
The key word is could. The example illustrates the potential effect of the survey’s projections. It is not a promise that a particular home will appreciate by that amount.
Still, it explains why comparing rent with a mortgage payment alone does not tell the whole story. Renting may leave you with a smaller monthly housing payment, while buying offers an opportunity to gain equity as you pay down the loan and as the property’s value grows.
Those are different financial considerations. A useful decision gives both of them room, without treating possible future appreciation as a substitute for an affordable payment.
How to Make the Comparison Useful for You
National medians and appreciation examples can help explain the tradeoff. Your personal finances determine whether that tradeoff makes sense for you.
Work through the decision in this order:
- Compare the monthly payments. What would renting cost, and what mortgage payment are you considering? Start with the numbers relevant to your options.
- Decide whether buying fits. If the numbers truly do not work, do not use potential equity growth to talk yourself into a purchase.
- Consider your plans to stay. The appreciation example assumes five years of ownership. Think about whether that kind of timeline matches your plans.
- Add equity to the discussion. If you are ready and financially able to buy, consider loan paydown and potential appreciation alongside the monthly payment.
The goal is not to prove that renting is always better or that buying is always better. It is to avoid making a long-term housing decision from just one number.
The Bottom Line
Renting may offer a lower monthly payment. Buying offers something renting does not: the chance to build equity in your home. Which option makes more sense depends on your finances and whether you are ready to buy.
Your next step is to put the rental and purchase options you are considering side by side. Talk with a local real estate agent about your housing choices, and reach out to Ed Parcaut to review the mortgage side of the comparison. Start with a payment that works, then give equity its proper place in the decision.
