You may have seen reports in the news saying people should ditch their home-buying dreams because it’s cheaper to rent right now than to buy a home. And while that may be true if you just look at typical monthly payments, there’s one thing the numbers aren’t factoring in: home equity.
Home equity is the measure of how much you own in a home. Paying monthly mortgage payments, making valuable upgrades and living in a desirable neighborhood can increase the value of your home over the years.
Buying a home is an investment in your future. You might have a 401K through your workplace and have been squirreling away money for retirement, but one of the biggest impacts you can make on your financial future is increasing home equity. If you are serious about creating wealth for your future, then you need to consider how home ownership is a valuable piece of financial security.
Here’s a look at how big of an impact home equity can have over the following years and why it’s worth considering as you make your decision.
Looking at the Data
The graph below displays national data from Realtor.com on the median rental payment and median mortgage payment from the National Association of Realtors. Just looking at flat monthly payments, it can be more affordable to rent:
However, how much space you need is a large factor. Looking at the graph, the median monthly mortgage payment for a home is $2,040. Meanwhile, the median monthly rent for 2 bedrooms is $1,889. If you have been debating whether to rent or buy, the differences shrink when your needs for space increases. The gap between median rent and median mortgage payment shrinks to a minimal difference–about $151 a month.
But what this data does not factor in is future home equity.
How Equity Changes the Game
If you rent, your monthly payments go toward your housing costs and your landlord’s expenses. That’s it. So other than maybe getting your rental deposit back when you move, the money you spent on renting each month is gone – forever.
When you buy, your mortgage payment pays for your home in small portions. Unlike renting, this payment acts as an investment. That investment grows in the form of equity as you whittle down your mortgage each month and chip away at what you owe on your home loan. And anytime you make an upgrade or renovate your home, the value of your home goes up. Your equity also gets an extra boost as home values climb – which they have been predicted to do.
How Equity Stacks up Over Time
Each quarter, Fannie Mae and Pulsenomics publish the results of the Home Price Expectations Survey (HPES). It asks more than 100 economists, real estate professionals and investment strategists what they think will happen next with home prices. In the latest release, those experts predicted home prices will increase over the next five years.
Here’s an example of how equity builds based on the projections from the HPES:
Imagine you purchased a home for $400,000 at the start of this year. Based on the HPES’s projections, if you live there for 5 years, you could gain over $83,000 in household wealth as your home’s value climbs.
While you may save a bit on your monthly payments if you rent right now, you’ll also miss out on gaining equity. Like any investment, starting as early as possible provides compounding value in the long run. And with the above graph, home prices are only predicted to get more expensive.
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. Or you may be at a stage in your life where you are not ready to settle down in one location.
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.
Bottom Line
When it comes down to it, buying a home gives you a benefit renting just can’t provide – and that’s the chance to gain equity. Ready to start your home-buying journey? Reach out to a Seven Gables agent today. Your future self will thank you for it.
