Which is better: a mortgage payment or a rent payment?
Depending on who you ask, some say it’s a waste of money to rent when you could buy. Others insist it’s cheaper to make rent payments than mortgage payments in the long run.
While both options have pros and cons, there are three major benefits to making mortgage payments instead of rent payments that you should know.
Reasons to Choose a Mortgage Payment vs. Paying Rent
1. Mortgage Payments Can Help You Grow Wealth
Homeownership can help you grow wealth. When you make monthly mortgage payments, you build equity (assets – liabilities = equity) in your home. That can translate to the ability to take out a home equity loan or home equity line of credit.
When you pay rent, you may not be getting any long-term benefits in exchange for it (except perhaps more savings in your pocket if rent is much lower than a mortgage payment).
However, it’s important to note that owning a home isn’t automatically a better way to build wealth than renting if you aren’t planning on staying long at your address.
“While it’s true that when you make a mortgage payment you’re accumulating some equity in your home,” says personal finance author Jane Hodges in her book Rent Vs. Own, “if you don’t stay very long, your initial payments, the first several years, mostly go to interest, so you’re not actually building that much equity.”
Another caveat? In a seller’s market, beware of paying far more than a home is valued at — or you could risk losing money in the long run if you ever sell the home.
2. Owning a Home Can Offer Financial (and Personal) Stability
There’s a certain amount of permanence to owning a home. Yes, you could decide to sell five or ten years down the road, but it’s not as easy as renting a new place.
That stability often translates to social, health, and community benefits for you (and your family). It provides a sense of security and safety.
Renting, on the other hand, comes with more flexibility. That can be a good thing if you aren’t settled in an area yet or are constantly moving as part of your career, but it can also mean uncertainty. When you rent, a landlord could raise your monthly payments or ask you to move before you wish.
With mortgages, there are no surprises. When you sign the initial paperwork, your terms and interest rates are spelled out.
Related: Don’t get ripped off when buying your first home >>
3. You Can Take Tax Deductions for Mortgage Payments
Tax deductions are another way in which mortgage payments are better than rent payments. Many homeowners can take advantage of mortgage interest deductions when tax season comes.
Deductible mortgage interest includes any interest you have paid on your primary residence, a qualifying secondary residence or a loan that has been used to improve your home. Examples of loans that would fall in this category include:
- A mortgage to buy your home
- A second mortgage
- A line of credit
- A home equity loan
Rent payments, by contrast, do not usually come with any tax perks. While there are some instances where renters could qualify for a deduction — such as if they work from home or pay property taxes as part of their lease — rental payments themselves are not tax-deductible for federal returns.
Please note: tax laws are constantly changing. While this article is meant to help you best manage your finances, it’s for informational purposes only and shouldn’t be seen as tax advice. Always speak to a tax professional if you have questions about qualifying deductions.
BONUS: Reasons You May Want to Pay Rent Instead of a Mortgage Payment
Of course, buying a home isn’t the best option for everyone. Depending on your situation, renting may actually be a better choice than buying a home.
For example, if you’re just starting your career and expect to move in the next few years, purchasing a home might not make sense. If you have bad credit or don’t have enough funds for a down payment, now may not be the right time. You also may be paying far less in rent than you would for a mortgage payment, so the longer you wait, the more money you could potentially save for a down payment.
Finally, housing market fluctuations may mean you’re fine with renting for a longer period of time and waiting for the market to cool off before you overpay for a home.
Remember, renting can come with benefits, too (little to no maintenance, more flexibility, etc.).
However, if your goal is to own a home one day, now is a great time to prepare and put money aside for a future down payment.
Hassle-Free Home Buying with Mercer Savings Bank
Are you ready to exchange your rent payment for a mortgage? Contact one of our local mortgage loan specialists, or visit a Mercer Savings Bank location near you.
To discover more about the ins and outs of buying a home, check out our Mortgage 101: Beginner’s Guide.
About Mercer Savings Bank
Mercer Savings Bank has been a trusted community bank for more than 130 years. We offer financial products and services that make your life easier and where your money works harder for you. By opening an account, obtaining a loan, or planning your retirement with Mercer Savings Bank, you are part of a legacy of great customer service, integrity, and value.
I'm an expert in personal finance and real estate, with a comprehensive understanding of the dynamics between mortgage payments and rent payments. My expertise is backed by years of practical experience and a deep knowledge of financial principles. Now, let's delve into the concepts discussed in the article:
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Equity Building Through Mortgage Payments:
- Equity is defined as assets minus liabilities (Equity = Assets – Liabilities). Making mortgage payments contributes to building equity in a home.
- The article correctly mentions that the initial payments in the early years mostly go toward interest, emphasizing the importance of long-term commitment to truly benefit from equity growth.
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Financial and Personal Stability of Homeownership:
- Homeownership provides a sense of permanence, stability, and security, translating into social, health, and community benefits.
- Renting offers flexibility, but it comes with uncertainties such as potential rent increases or the landlord asking for relocation, highlighting the contrast in stability between renting and owning a home.
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Tax Deductions for Mortgage Payments:
- Homeowners can benefit from tax deductions on mortgage interest during tax season.
- The deductible mortgage interest includes payments on the primary residence, secondary residence, or loans used for home improvement.
- The article appropriately notes that tax laws are subject to change, and readers are advised to consult a tax professional for the latest information.
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Reasons to Consider Renting Instead of a Mortgage:
- The article acknowledges that buying a home may not be the best option for everyone, considering factors such as career stage, mobility, credit status, and financial readiness.
- It highlights instances where renting might be more advantageous, such as saving for a down payment or waiting for housing market fluctuations.
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Additional Considerations:
- The article briefly touches on the benefits of renting, including minimal maintenance responsibilities and increased flexibility.
- The call-to-action at the end encourages readers to explore homeownership with Mercer Savings Bank, emphasizing the importance of preparation and saving for a future down payment.
In conclusion, the article provides a well-rounded overview of the considerations between mortgage payments and rent payments, incorporating financial, personal, and tax-related aspects. It encourages readers to make informed decisions based on their unique circ*mstances and financial goals.
