Beware the Rental Trap: Why Buy vs. Rent
Growing up, we were always taught that one of the measures of success is to be able to own a home. Our parents, and even their parents before them, has always known that this is a financially savvy move. But as the times change, jobs and the real estate market has seen their own share of turbulence. One can understand why there isn't much confidence in home owning in the past couple of years.
The recent changes that brought back the real estate market brought with it some lessons from the past - That home-ownership CAN BE a financially savvy move but ONLY IF people actually bought the homes they CAN AFFORD and then gradually build wealth from there.
What is the "Rental Trap"?
The Rental Trap is the term for being locked in a rental contract in a specific period of time while the rental costs rise. It is one of the most prevalent issues for renters where households struggle between balancing the rising rental costs and also saving for rainy days, being able to pay bills, buy groceries, and afford decent healthcare. The renter is essentially "trapped" in an endless cycle due to rising rental amounts and not able to gain foothold in terms of financials.
Consider this statement from the Joint Center for Housing Studies at Harvard University’s 2018 State of the Nation Housing Report:
"Homeownership rates among young adults are even lower than in 1988, and the share of cost-burdened renters is significantly higher, with almost half of all renters paying more than 30 percent of their income for housing. Soaring housing costs are largely to blame. The national median rent rose 20 percent faster than overall inflation between 1990 and 2016..."
Why Buy vs. Rent?
Long Term Perspective:
Buying IS cheaper than renting
Here's a thought: You will always need a place to live in. And while you spend time and money in your current "living space", consider that down the line if you bought the house, mortgage payments build equity. This is for a property that you will eventually own, whereas rent payment only goes towards maintenance and your landlord's wallet.
What is EQUITY?
Equity is the amount of money you can sell your home for minus what you still owe for it. For every month that you pay your mortgage and reduce the amount you owe for it, the higher the equity you have for your home.
Mortgage: a forced savings plan
It is always a good idea to "save for a rainy day" - we've heard that line since time immemorial. The house that you buy, in essence, is also your piggy bank. As you pay that mortgage monthly and reduce the amount of your principal, you build valuable equity. In a sense, once you've paid the balance, the money you've spent is also something that you've saved in the form of your new home.
Get the Tax Benefits!
The tax code allows homeowners to deduct the mortgage interest from their tax obligations. For many people this is a huge deduction, since interest payments can be the largest component of your mortgage payment in the early years of owning a home.
A nationwide survey of about 24,000 renters found that 80% of millennial renters plan to eventually buy a house, but 72% cite affordability as their primary obstacle. Many first-time home buyers who believe that they need a large down payment may be holding themselves back from their dream homes. In most cases, these folks are not aware that in many areas of the country, a first-time home buyer can save for a 3% down payment in less than two years. Don’t get caught in the trap that so many renters are currently in.
You may have already saved enough!
If you want to know where you currently stand, what your options are,
and how to hurdle your home owning setbacks!