Why Do Some Object to Renting a House but Completely Overlook the Fact that a Mortgage Is Essentially a Form of Renting Money?

Homeowners, especially those with mortgages, are all too familiar with the concept of debt and how much they could offset by renting out their property. However, many choose to live in the property they own outright, often overlooking the fact that taking out a mortgage is essentially renting money. While it may not be a word that pops into their vocabulary, homeowners definitely understand what borrowing means.

The Age-Old Comparison of Renting vs. Owning

The classic debate between renting vs. owning has been around for decades, and it’s worth revisiting in light of recent changes in tax laws and real estate trends. In years past, real estate agents and mortgage lenders often highlighted the significant tax benefits associated with home ownership, such as deductible mortgage interest. However, the Tax Cuts and Jobs Act, signed into law in 2017, eliminated these tax benefits for most homeowners.

So, without those tax savings, we must look at the core housing costs of renting vs. owning. Is it possible to justify one over the other?

Buying a Home with a Mortgage

Let’s consider a hypothetical scenario where you can buy a home worth $300,000 with a 20% down payment. Your monthly mortgage payment, including taxes and insurance, would be around $1,525. Assuming you could rent a similarly priced house for $1,000, is it justified to pay an additional $525 a month?

The Logic Behind the "Forced Savings" Principle

The first thing to note is that each mortgage payment reduces the principal balance. This might seem like a small amount in the early years, but it's not insignificant. For example, with a 4% interest rate, your mortgage payment on a $240,000 loan would be $1,145 monthly. In the first year, you would pay down the balance by $4,200 to $235,700. This can be seen as a form of forced savings, amounting to about $350 each month. Thus, your effective monthly payment would be around $1,175.

Still, this is more than the rent you could get. Furthermore, as the owner, you'll be responsible for any repairs and maintenance needed on your property. This additional cost must be considered.

Rents vs. Mortgage Payments: A Comparison

A key factor often overlooked is that rents tend to increase with inflation, while a fixed-rate mortgage payment stays the same over time. While property taxes and insurance will rise over time, these components represent a small part of the total house payment.

Few landlords own single-family homes and raise rents annually, but the inevitable day does come when rents will go up due to market forces and inflation. Even if a landlord is accommodating and seldom increases the rent, the property will eventually be sold to recoup their equity, leaving the tenant at the mercy of the rental market.

For instance, a property renting for $1,000 today might rent for $1,200 or more in five years, or even more in a particularly tough rental market. Meanwhile, the cost of owning a similar home will remain relatively stable. Therefore, there will come a time when owning the home will be less expensive than renting.

Other Considerations

While discussing replacement costs and opportunity costs is valid, it would make this discussion unnecessarily long and complex. However, let's briefly touch on these concepts. Replacement costs refer to the fees associated with repairing or replacing parts of the property. Opportunity costs involve the potential benefits you might miss out on by owning a home, which could include the flexibility of moving or the ability to use your money for other investments.

Even so, the main argument remains: while owning a home has its advantages, renting a house can be more economical in the long run, especially in areas where property values aren't expected to rise significantly.

Before any of my readers pounce on the fact that I haven't addressed replacement costs and opportunity costs, I understand that these concepts are valid and can be explained. However, delving into these matters would make this discussion overly complex and not much more useful than this one.

I hope this provides a helpful perspective on the rental vs. ownership debate.