Weighing options for renting and buying

Should I rent? Or should I buy a home? This is a frequent conversation these days, particularly among young professionals who are considering whether or not it’s worth it to save up for a down payment, only to then be burdened by the debt of a mortgage. If this sounds like a dilemma you’ve been thinking through, please read on, as this article is written with you in mind.  

There are a number of factors to consider when contemplating the decision to purchase a home versus renting one. But for the purposes of this article, let’s focus on the long-term financial implications of the two.  

Let’s say we’re comparing the decision to continue renting a home at a cost of $2650 per month, versus purchasing a home with a monthly mortgage payment of $2673.53 per month. Both options have a similar payment, so one may assume that there would be little impact to either choice, given that the monthly expenditures are equal. However, if that’s an assumption you just made then it’s likely that you’re focused on the short-term cost versus benefit, rather than the long-term cost versus benefit.  

For the purposes of illustration, let’s look at the charts below.  

 Monthly PaymentNumber of YearsTotal Amount PaidLandlord/Bank ProfitsEquity in Home

Original CostAnnual Rate of AppreciationValue in 30 YearsEquity from Appreciation

The renter paid $2650 each month over the course of a 30-year period.  At the end of 30 years, the renter is left with nothing more than the memory of homes they’ve rented after having paid out $963,000. 

On the other hand, the buyer who purchased a $700,000 property will be left with an asset worth an estimated $3,000,000 at the end of a 30-year period! How can this be right?

The buyer has two advantages working in their favor over the renter. First, each monthly payment made to the bank is carved into two pieces: the principal, which is then used to reduce the amount of money the borrower owes the bank, and the interest, which is the profit the bank makes from the loan. This means that the buyer’s net worth grows each month as they reduce the amount they owe the bank and increase the amount of equity they hold in the asset. The second advantage the buyer receives is the appreciation on the value of the property. An appreciation rate of 5% per year is a pretty modest rate for real estate over time, particularly when looking at the last decade. While 5% may seem like a small figure, the charts here demonstrate that it can have a large impact over this 30-year period, with the $700,000 property now being worth over $3,000,000.

At this point it should be clear that a well-thought-through home purchase can be a much better option financially. However, you may find yourself thinking that this is all well and good, but how is a first-time buyer supposed to come up with a down payment of $140,000? The good news is that there are a number of programs out there designed to get homebuyers into homes for down payments that are as little as 0% to 3% of the cost of the home. These lower down payment options are an excellent opportunity for a first-time homebuyer given the low barrier to entry, and the potential for building net worth over time. And here at Alpine Bank, any of our friendly and knowledgeable mortgage lenders are happy to schedule a time to discuss options for purchasing your first home. Please reach out to your local lender. You can meet our team and make contact here.

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