Rent, or Buy? The question is one often weighed with pros and cons for the potential homebuyer. But when the biggest pro is offering multiple chances to save, the answer becomes pretty clear.
A recent study by the Joint Center for Housing Studies at Harvard University had some good news for home buyers: that by paying down your mortgage principal, homeownership actually forces you to save in a way that renting never could. As realtor.com chief economist Jonathan Smoke explains it, this takes the Rent vs. Buy debate well beyond monthly payments.
As a homeowner, your mortgage payment has an interest component and a principal component. The proportion of these two components within each of your monthly payments will change, usually starting with a higher interest portion and shifting to a higher principal portion over time. As you pay down the interest and your payments become more predominantly against the principal, you are investing more in your own property ownership, without increasing your monthly payment.
This “forced” savings plan not only allows you to increase your investment, but the value of your investment (your home) is guaranteed to grow over the life of your mortgage. And despite the appreciation of your home, your principal will never be increased. Harvard’s Housing Study, as an example, examined common home prices over a rough 30 year period, from 1975-2012. After adjusting for inflation, they found a 26% increase in average value. That makes your home worth 26% more at the end of a 30 year fixed mortgage with no change in monthly payments.
Amidst all the things that homeownership gives you, there is also one that it takes away: rising rent costs. The majority of your mortgage payment is fixed, regardless of the value of your home, the state of the home-buying market or the current “cost of living.” While renters will continue to watch monthly payments rise year after year for the same product, as a homeowner, your payments will remain steady and serve as a steady investment.
The benefits of owning a home from a personal standpoint are countless: from pride of ownership to the ability to make a space your own. This increasing amount of research, however, is starting to show us the financial benefits, too.
Are you a renter looking to pursue homeownership? Our sales associates here at Haven Ridge are always happy to talk through your options and answer your questions.