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The Timeless Debate of Renting vs Owning: Which is Cheaper?

August 17, 2016

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The conventional wisdom is that, in today’s market, owning a home is less expensive than renting in many cities nationwide. It almost seems counterintuitive. How can the costs of owning and maintaining an entire home be less than renting an apartment?

According to Trulia, as of 2015, purchasing a home was 23 percent cheaper than renting in America’s 100 major real estate markets. Since then, interest rates on home loans have fallen to historic lows, making it even more affordable. However, parsing the costs related to renting versus owning makes it difficult to understand how this can be the case.

“In the long term, owning almost certainly pays off.”

The key is to recognize that owning a home may, in the short term, end up more costly than renting, but in the long term almost certainly pays off. While in many areas a mortgage payment ends up being only marginally larger – or even equal to or less than – equivalent rent, owning requires certain larger up-front costs: a down payment, brokers fees, closing costs and more, all adding up to anywhere from 10 to 25 percent of the total cost of a home.

Renting seems less financially demanding. A security deposit and several months rent due at lease signing will not likely add up to be nearly as much as a down payment. Yet owning a home can garner you significant tax savings, often making a large enough dent in mortgage payments to bring it under what it costs to rent.

Equity also changes the equation. When you rent, everything you pay goes to a landlord/homeowner. Once you’ve paid it, it is gone. You cannot get that money back or leverage what you’ve already paid. With every mortgage payment, however, you own more of your home – a valuable asset that you can later rent, sell or leverage the equity of. Essentially, each time you pay your mortgage, you are metaphorically depositing money into an account you can withdraw from later.

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