Is it Better to Rent or Buy?
If you’re at the point in your life where you are considering saying goodbye to the renter’s life and becoming a homeowner, it is important to find out which one is actually a better financial decision. Traditionally, buying is always the sounder financial decision, especially when rates are low.
When looking at the present, and trying to predict the future, it will likely serve you best to look at the past and its context to best understand how mortgage rates behave. After all, those rates will end up dictating how much you pay in order to take out your loan over the life of your loan.
Let’s break down mortgage rates.
Mortgage rates are just like any line of personal credit. That means they come with interest – which is the cost of borrowing money from a bank, online lender, etc. A host of market factors beyond the lender’s control determine what rates will be available to you. Those factors include the bond market and how likely investors are to buy mortgages bundled as investment securities.
Regardless of that, however, there are some stone-cold facts that you should know.
1.Rates have been falling for years. Because the 30-year fixed rate mortgage is without a doubt the most common, we’ll use that as an example. If you look at a graph, you will see that over the last 20 years, rates hit a high point just around the turn of the new millennium. Since then, they’ve been steadily falling at a consistent rate. It is now possible for you to get a mortgage with interest rates that are half as much as they were back in 2000. How crazy is that?
2.Buying a home is always a bargain. Back in the summer of 2000, the median price of a home in the United States was $140,000 and the rate on a traditional 30-year mortgage was 8 percent. If a borrower financed that home at 90 percent, the principle and interest combined equaled approximately $925 a month. Compare that to the median price of a home today – which is closer to $250,000 – and a 30-year fixed-rate mortgage at 3.8 percent interest. If a borrower finances 90 percent of the home, the principle and interest will be around $1,025 a month. This proves that over the span of nearly 20 years, the average mortgage payment has increased by just $100. This, of course does not take into consideration things like taxes, insurance, and other expenses, but it still proves that owning a home has become just a bit more expensive even though the costs of homes across the country have increased substantially.
To make this fact even more impressive, rental rates continue to rise with no sign of actually slowing down. Last year, the Wall Street Journal, reported that in 2015 rent increased by 4.6 percent. That means that if you spent $1,125 per month in 2014, you were going to spend $1,180 for the very same place a year later. That means rent went up 55 bucks more in the span of a year. Compare that to the $100 increase in mortgage rates over a nearly 20-year span, and you’ll get an idea for how much money you can really waste on a property that you don’t even own!
Financial Impact of Renting vs Buying
The bottom line of all this information is that owning a home is a much more financially sound, and genuinely affordable investment compared to renting.
But what else should you keep in mind? One of the primary things you should know is that rates will rise again. As the economy continues to strengthen, mortgages are going to inevitably go up. According to the Mortgage Bankers Association, rates could potentially reach 5 percent by the year 2019.
The new Fed has proven to favor deregulation which could certainly help the economy grow even fast that it has over the last decade. That will cause rates to go up. In order to keep pace, Fed chair Jay Powell will likely hike rates to balance economic growth and inflation. In fact, Powell recent said during the Fed’s annual retreat in Jackson Hole, Wyoming, that rates could jump an additional two times before the end of 2018.
Rising rates with have an effect on total mortgage originations next year. The MBA is forecasting that total origination for 2018 will decrease anywhere from $90 billion to $1.597 trillion. At that same time, purchase money mortgages will increase anywhere from $80 billion to $1.167 trillion. This will create a great opportunity for mortgage lenders across the country because a huge percentage of the total loan amounts closed in American per year are for mortgages.
Which is Right?
While there are quite a few factors that make is abundantly clear that buying a home is a sounder investment than renting, it really is up to your own financial situation. Buying a home comes with many more expenses than just paying for a mortgage. It is a huge life decision and an even bigger responsibility. When looking for a home to buy, the first step is to browse available options. See the RateBuddy guide on the best house hunting websites.
If you are ready for owning a home, and all the challenges that come it, take solace in knowing that you are making a sound investment. If you are not yet ready to do so, however, do not feel like you are being pressured. Renting is still a legitimate option and leasing will always be available to those who need it.