Could A Higher Monthly Mortgage Actually Be Cheaper Than Lower Priced Rent?
Are you weighing the decision between renting and owning a home? This choice is not only about where you live but also has significant long-term financial implications. Many people compare monthly rent to a mortgage payment and assume renting is cheaper. However, homeownership offers benefits that go beyond the initial cost, such as property appreciation, tax deductions, and building equity. In this blog, we will provide a detailed comparison of renting versus owning, factoring in these additional benefits to give you a clearer picture of why a more expensive mortgage can actually be cheaper than an affordable rent payment.
“A lot of people don’t realize just how much wealth is made simply by owning a home.”
Monthly Payments: Renting vs. Owning
Assumptions for Our Comparison
To create a realistic scenario, we’ll use the following assumptions:
- Home Purchase Price: $300,000
- Mortgage Interest Rate: 7%
- Loan Term: 30 years
- Down Payment: 3.5% ($10,500)
- Initial Loan Amount: $289,500
- Monthly Rent: $2,100
- Property Tax Rate: 1.2% of home value
- Home Insurance: $1,500 per year
- Home Appreciation Rate: 3.9% annually (25-year average)
- Annual Rent Increase: 8.86%
- Marginal Tax Rate: 25%
Let’s start with the basics—monthly payments.
Rent:
- Monthly Rent: $2,100
Owning:
- Principal and Interest (P&I) Payment: $1,925 (based on a $289,500 loan at 7% over 30 years)
- Property Taxes: $300
- Home Insurance: $125
- Total Monthly Mortgage Payment (PITI): $2,350
At first glance, the mortgage payment of $2,350 seems higher than the $2,100 monthly rent. However, this doesn’t tell the whole story.
EFFECTIVE MONTHLY PAYMENT AFTER APPRECIATION
One of the key benefits of homeownership is property appreciation. On average, home values appreciate at a rate of 3.9% per year. Here’s how that looks:
- Annual Home Value Appreciation: $300,000 * 3.9% = $11,700
- Monthly Home Value Appreciation: $11,700 / 12 = $975
When you subtract the monthly appreciation from the mortgage payment, the effective monthly payment is considerably lower:
- Total Monthly Mortgage Payment (PITI): $2,350
- Subtract Monthly Home Value Appreciation: $2,350 – $975 = $1,375
TAX BENEFITS OF OWNING A HOME
Homeownership comes with significant tax benefits, primarily the mortgage interest deduction and property tax deduction. Let’s calculate the annual tax savings:
- Annual Mortgage Interest Paid (First Year): $289,500 * 7% = $20,265
- Annual Property Taxes Paid: $300,000 * 1.2% = $3,600
- Total Deductible Amount: $20,265 + $3,600 = $23,865
- Tax Savings (Marginal Tax Rate 25%): $23,865 * 25% = $5,966.25
- Monthly Tax Savings: $5,966.25 / 12 = $497.19
Adjusting for these tax savings, the effective monthly payment becomes:
- Effective Monthly Payment After Appreciation: $1,375
- Subtract Monthly Tax Savings: $1,375 – $497.19 = $877.81
LONG-TERM RENT INCREASE IMPACT
RENT VS. OWNING: MONTHLY PAYMENT COMPARISON OVER 5 YEARS
Given an annual rent increase of 8.86%, the cost of renting escalates quickly over time. Here’s a projection over five years:
| Year | Monthly Rent ($) |
|---|---|
| 0 | 2,100 |
| 1 | 2,287.06 |
| 2 | 2,490.44 |
| 3 | 2,711.09 |
| 4 | 2,950.09 |
| 5 | 3,208.55 |
AMORTIZATION AND EQUITY BUILD-UP
An important aspect of homeownership is the gradual paydown of the mortgage principal, which builds equity over time. Here’s how the principal balance decreases over the first five years:
Over the first five years, you would have paid down the mortgage principal by $19,573, building additional equity in your home.
“I bought my first home in 2006, I was 23, just a dumb kid honestly. I wasn’t thinking about wealth, I just wanted a cool house with a pool. I look back now and buying as early as I did set me up for success and I was $150k ahead of most of my peers entering the market for the first time while I was trading in the same market.”
COMPARISON SUMMARY
Year | Beginning Balance ($) | Principal Paid ($) | Ending Balance ($) |
|---|---|---|---|
0 | 289,500 | – | 289,500 |
1 | 289,500 | 3,465 | 286,035 |
2 | 286,035 | 3,722 | 282,313 |
3 | 282,313 | 3,997 | 278,316 |
4 | 278,316 | 4,289 | 274,027 |
5 | 274,027 | 4,600 | 269,427 |
CONSIDERING THE FACTS
While the initial monthly payment for a mortgage might appear higher than renting, the effective payment after accounting for home value appreciation, tax benefits, and equity build-up tells a different story. Over time, owning a home builds equity and offers financial advantages that renting simply cannot match. Additionally, with rent increasing at an average rate of 8.86% per year, the cost of renting quickly escalates, making homeownership an even more attractive option.
By considering these factors, you’ll see that homeownership is not just a place to live but a smart financial investment. If you’re ready to make the move from renting to owning, this detailed comparison provides the insights you need to make an informed decision.
Homeownership offers stability, investment in your future, and the peace of mind that comes with owning your own space. It’s time to take a closer look at the long-term benefits and make a decision that’s best for your financial health.
Let’s Get Started
Are you feeling overwhelmed as a first-time homebuyer? At Plains Paris, we’re here to make real estate simple and stress-free for you. We guide you every step of the way, ensuring you understand your options and feel confident in your decisions. Our expert team is dedicated to supporting you from start to finish. Relax—we’ll get you there! Reach out to us today and take the first step towards owning your dream home.
