Choosing to rent in the midst of the market these days can provide a lot of benefits. In the midst of the housing market growing rapidly, jumping into a home payment with all the responsibilities it entails can put you in a serious bind financially. However, there are multiple myths surrounding the renting market that are necessary to be aware so you can make the best decision, as well as know the truth behind them. Let’s take a look at some of the most common myths regarding renting a property, and debunk any myths that may be giving you false information. Here are the myths we will be looking into:
- Renting wastes your money
- Finding the right deal on a home means your should buy it
- You won’t benefit from renting
Myth 1: Renting Wastes Your Money
One of the most notorious myths stated in regards to renting sounds something along the lines of, “If you’re renting you’re throwing your money away.” Understanding this theory is coming from the aspect of paying money down for a home and continuing to pay a monthly mortgage, which goes toward the overall cost. While that statement is’t untrue, it doesn’t inevitably equate to “renting throws your money away”. To fully understand the logic behind debunking this myth, we will need to understand equity, and how it works.
Equity Is What, Exactly?
Simply put, home equity it money made on your home which goes directly to you. It is measured by taking what you own and subtracting the remainder of what you owe. For example, let’s say your home is valued at $300,000. If you owe $250,000, your equity is $150,000. Pretty simple, and sounds good to be able to get money in your pocket. Take a moment to consider this though, when also looking at how much equity is truthfully being built. Here, let us help.
Your mortgage is broken down into four separate parts:
- Principle (the equity building portion we mentioned earlier)
Unfortunately, once you break everything down, the rest (ITI) ends up being where most of your monthly payment goes. Mortgages are designed to be mostly interest in the first decade to fifteen years. To help grasp this understanding further, let’s set up a visual example of how your monthly payments look, and how that works out with equity building.
Let’s say we’re looking at your $300,000 home again. The amount you put down, which according to the ideal amount would be about 20% (60,000), leaves you with the amount you will have to borrow. In this case, it would be 240,000. If you get a 30-year home loan, the average interest rate according to a mortgage buyer, Freddie Mac, is about 4.32%, with an average property tax rate of 0.94% in Atlanta. Per year, this amounts to about $2,943. So,
- $300,000 House
- 20% Down payment of $60,000
- You borrow $240,000 with a 4.32% fixed interest
- Property taxes cost $2,943 annually
- Plus homeowners insurance average cost of $975/year
- No mortgage insurance
Total, your monthly mortgage will cost you: $1,517.01, including taxes, insurances. With down payments of 20% or more on a home, no PMI (private mortgage insurance) will be required. Now, to see what those payments are actually doing each month, or where they are going, helps shed light on the necessity of understanding what you are getting into financially when you buy a home. Here is a table to reference using our numbers listed above:
|Payment||Date||Principal||Interest||Taxes & Insurance|
When you break down your monthly payments, you can easily see the amount going towards your principal each month is only around $330. That means the rest of your money can be identified as money you “throw away”. This trend of payments will be the norm for the next decade at least, and your accumulation of equity won’t substantially kick in until the last decade of paying your mortgage.
All in all, understanding what the wisest direction for you financially is the best way to look at renting versus marketing. Sure, at some point you will start accumulating equity, but the amount of time and sheer cost it will get there may not be feasible for you at this point. Even if you are looking at the bigger picture, opting out on renting could cost you a hefty amount for a longer period of time.
Myth 2: You Will Always Have to Pay Rent, Mortgages End.
As stated with the first myth, while this is not untrue, it’s not the whole picture. Do mortgages end? Yes, but there are multiple costs that factor into a home and contribute to the other expenses that play a part in owning a home. Furthermore, even after you fully purchase your home, that does not mean you will never spend more money on it. Here are a few of the other factors that play a part in your budget:
- HOA if applicable
- Taxes (discussed above)
- General maintenance
- Closing costs
Just to name a few. How much does this add up to you ask? More than you’d like to think. The result of the additional fees, on top of your mortgage, is equal to or higher a monthly rental payment. Another thought to consider, while you may eventually gain equity from a home, either way you spin it, you are going to be spending money on some form of housing for the remainder of your life. The decision you make will need to be based on which route is most financially feasible for you.
These are just a few of the myths that are commonly thrown around when it comes for renting. Though it may be easy to remember cliche statements, dig into the technical information yourself and find the data breakdown. Atlantic Properties Inc. is here to help provide an array of rental property management options to cater to a variety of homes. You can trust your property is in the right hands with Atlantic Properties. Visit our website to learn more, or contact us today!