The dream of homeownership has long been considered the yardstick of the American Dream. Economic pundits have referred to homeownership as the gateway to the middle-class.
Since 1990, the U.S. homeownership rate has ranged from 63.7% in 2016 (the lowest in that 3-decade window) to 69.2% at its height in 2004.
However, since 2016, when the percentage of Americans who were homeowners bottomed out (reaching a level not seen in a quarter-century), homeownership rates have been steadily climbing. As noted in the graph below, they had reached more than 65% in 2019.
The reasons for these variations in homeownership rates do – as one would expect – coincide with the cyclical nature of a broader economic picture.
For instance, the real estate boom began in the early 1990s, resulting in a homeownership percentage rate that neared 70% by 2004. However, just a few years later, homeownership percentage rates free-fell to 63.7% – nearly 8% – all due to the 2007-2008 economic/real estate/mortgage meltdown.
The reality is, despite the place in the economic cycle, if you are in a position to own a property, there are some persuasive reasons to do so. Research has shown that there are quite a few unique benefits to owning where you live compared to renting where you live.
Perhaps there are a few benefits that you could take advantage of…
4 Reasons It’s Better to Own Than Rent
Reason #1 – Money is really cheap.
Could there be a better reason to decide to own right now?
Currently, (as of Oct 10,2020), mortgage rates sit at historic lows, with these available fixed-rate mortgage products available, according to Bankrate’s national survey of mortgage lenders –
- 30 Year Fixed Rates (for non-jumbo mortgages) – 3.05, with an Annual Percentage Rate (APR) of 3.36%.
- 15 Year Fixed Rates (for non-jumbo mortgages) – 2.56, with an APR of 2.87%.
- 30 Year Fixed Rates (for jumbo mortgages) – 3.11, with an APR of 3.20%.
- 15 Year Fixed Rates (for jumbo mortgages) – 2.58, with an APR of 2.64%.
And to provide you with a comprehensive snapshot of the mortgage product field & rates at this time, the current adjustable rate for a 7/1 ARM is 3.13%, with an APR of 3.83%. What is truly startling about this entire rate picture is that the adjustable-rate mortgage – in today’s market – is starting at a rate that is HIGHER than any of the current fixed rate product – jumbo or conventional!
Nearly 40 years ago, in 1981, Freddie Mac’s historical data reveals that interest rates meteorically rose to a rate greater than 18%, which is, by today’s rates, nearly six times the current rate of interest in today’s mortgage market!
When the mortgage crisis occurred around 2008, the average 30-year fixed-rate mortgage (Non-Jumbo) was 6.23%
Let’s review just how impactful (and cheap) today’s historical rates are if you were to consider obtaining a $200,000 mortgage for 30 years –
|30 Yr. Interest Rate/Date||Monthly Payment||Monthly Savings|
|6.23%||2008||$1,220||$3,014 – $1,220 = $1,749|
|3.05%||2020||$840||$1,220 – $840 = $380|
What is extraordinary about today’s interest rates – other than the fact that they will not stay this low indefinitely, is the following –
- If you could afford a principal and interest monthly payment of $3,014, (which only bought a $200K mortgage in 1981), this monthly payment in 2020 ‘interest-rate-dollars (@3.05%)’ would buy a mortgage of approximately $710,000.
Think about it…the same monthly payment in 2020 would allow you – the mortgage borrower – to ably manage a mortgage that exceeds the original amount by one-half of one million dollars! Now that is cheap money!
Either today’s mortgage interest rates will provide a whole lot more property (for the same cost!), or you can now buy a home that was once considered unaffordable and out of your reach.
Could there be a better reason to decide to own right now?
Reason #2 – Owning is Cheaper than Renting – Especially in the Long-Run.
Most people would argue that it is likely to cost more to buy a home than to set up a rental property arrangement with a potential landlord – at least at the outset. This is because most homeowners need some sort of capital/cash to cover the expenses of a down payment and closing costs of the home & mortgage.
However, there are several ways to meet the down payment and closing costs requirements when purchasing a home:
- Obtain governmental assistance for down payments, which are available in these types of programs, among others:
- Grants, which require no repayment and are essentially a gift to assist in the purchase of a property.
- 2nd Mortgages – that have deferred repayments not due until the home is resold.
- 2nd Mortgages – that are forgiven over a number of preset years, which can range from 5 to 20, depending on the program and jurisdiction.
- 2nd Mortgages with monthly payments.
There are also many programs offered by the Housing and Urban Development (HUD) that include the American Dream Down Payment Initiative and local homebuying programs sorted by state.
In September 2019, a study done by GoBankingRates.com evaluated the cost to rent vs. own across 31 U. S. Cities. The study specifically compares the average rental rates with the cost of owning a home, which includes
- The payment mortgage – using the median home price in that location (with a 20% down payment).
- Real estate taxes & homeowner’s insurance.
Some of the cities in the study where it is cheaper to own than rent are quite surprising, even for those who consider themselves real estate mavens. These cities, among others, include:
- Baltimore, MD – according to this study, Baltimore ranks among the top city where it pays to own rather than rent. The average monthly rent in Baltimore is $1,286 compares to the average monthly PITI payments at $978.
- Paul, MN – according to this study, St. Paul’s average monthly rent is $1,494 compares to the average monthly PITI payments at $1,268.
- Indianapolis, IN – according to this study, Indianapolis’s average monthly rent is $1,139 compares to the average monthly PITI payments at $943.
- Buffalo, NY – according to this study, Buffalo’s average monthly rent is $942 compares to the average monthly PITI payments at $776.
- Norfolk, VA – according to this study, Norfolk’s average monthly rent is $1,292 compares to the average monthly PITI payments at $1,142.
- Sacramento, CA – according to this study, Sacramento’s average monthly rent is $1,706 compares to the average monthly PITI payments at $1,622.
- Arlington, TX – according to this study, Arlington’s average monthly rent is $1,555 compares to the average monthly PITI payments at $1,545.
Many other states include cities where it is more affordable to own than rent. These states include Colorado, Arizona, North Carolina, Tennessee, Ohio, Missouri, Pennsylvania, New Mexico, Oklahoma, Alaska, Florida, Wisconsin, and South Carolina.
In addition to the fact that renting costs less than owning in many locations, homeownership is also beneficial as it helps homeowners save. This is discussed below.
Reason #3 – You Can Save with Little Effort.
One of the essential benefits of owning a home is the homeowners’ ability to save by the building of equity in one’s home. From a technical perspective, equity is defined as the difference between the market value and the outstanding mortgage balance of your property.
Equity is generally acquired three primary ways:
- By paying down the mortgage balance every month with the required mortgage payment.
- By the likely appreciation of the value of the home over time.
- By the amount of the down payment initially put down on the home at purchase.
Equity is an almost seamless way for homeowners to save. Available equity in a home that has been built through the process of homeownership helps homeowners pay for:
- Home improvements.
- Emergency expenses, when needed.
- Tuition for college or trade school.
- Energy-efficient systems to reduce the cost of operating the home and the family’s carbon footprint, to name a few.
The reality is that equity in your property allows you to access that cash/capital for almost any reason your family may need. In fact, many lending institutions offer Home Equity Lines of Credit (aka HELOCs) that allows you to access the equity when needed, but not pay interest charges until you actually use the available funds of the credit line.
Let’s consider an example to clarify how equity is built.
- In 2010, you bought a home for $200,000, with a 20% down payment ($40,000). As such, you obtain a mortgage for $160,000.
- In 2020, your mortgage balance is now $134,000, and the home has appreciated to a value of $300,000. What is your available equity in 2020?
To calculate the equity, simply subtract the current mortgage balance from the current market value, as follows:
$300,000 – $134,000 = $166,000 in equity.
As such, the initial down payment of $40,000 (your initial equity position) has grown to $166,000 due to the property’s appreciation and the consistent and regular mortgage balance reduction each month.
Other Ways to Save By Owning Real Estate
Some of the expenses associated with owning real estate include property taxes, homeowner’s insurance, and/or private mortgage insurance.
Some of these expenses may offer homeownership tax benefits as their payments may be considered tax-deductible by the IRS. These tax benefits are NOT available to renters.
Generally speaking, mortgage interest payments are deductible for first mortgages (although other mortgages may meet the IRS requirements), as well as real estate taxes – within certain limits, depending on the state in which you reside.
The tax-deductibility of the mortgage interest and real estate taxes will reduce your overall tax obligation, another great way to save as a homeowner.
Reason #4 – It is Your Home, Your Life, Done Your Way!
Homeowners have complete freedom to make the property exactly the way that works for them and their families. Some of the freedom granted to a homeowner – like adding a bedroom, remodeling a kitchen, or even getting a pet – requires the authorization/permission of the rental property owners.
The freedom to create the best possible and functional living space that facilitates you and your family’s success is a gift many renters would love to have.
A Word About Opportunity Cost
The concept of opportunity cost considers the value of any opportunity that you may choose to give up – in this instance when you choose to buy a home instead of renting a home.
Consider these issues that offer the largest measurements regarding the concept of opportunity cost – when deciding whether to buy or rent:
- The difference between the of a PITI monthly payment and the monthly rental cost.
- The amount of your down payment
- The amount of interest you’d pay over a set period, say five years
Here are two examples of opportunity cost in this situation:
- If your monthly mortgage payment is higher than the rental payment for a comparable unit, the difference is considered the opportunity cost. How much would you have earned financially if you invested this extra money (the difference between the mortgage and rental payment) in another investment? The answer to this question reveals the opportunity cost of this particular situation.
- If your down payment is $40,000, how would much would that money earn if invested differently?
Clearly, calculating the cost of opportunity is somewhat challenging as no one can predict how a stock or bond investment will perform before the passage of time. What if there was a huge stock market correction that caused a loss?
The Bottom Line
Homeownership is a prudent financial move, but homeownership is not for everyone. Consider the important guidance noted above to determine if owning will benefit your situation. You will likely be one of the majority of Americans who enjoy great benefits of homeownership.