Rent vs Buy: The Costs of Building Equity

Over the next few weeks, we’ll be featuring snippets from an article authored by the National Apartment (NAA) and the National Multi Housing Council (NMHC) entitled Don’t Buy the Myths: Renting Can Be a Smart Decision. The article focuses on 9 widespread misconceptions regarding the benefits of homeownership over apartment rentals.

MYTH# 2: Paying rent is throwing away money. I could be building equity.

During the first five years, more than 80% of your monthly mortgage payment goes directly to interest. Furthermore, since nearly one third of all homeowners move within five years, they never have a chance to start building any real equity. Also, if you take into account the money spent during that time on maintenance, taxes, insurance and the costs to buy and sell their house, most would have saved money by renting.

If you were to buy a $200,000 house with a 5% down payment at a 6% interest rate, you will have paid $55,152 in interest and only $13,196 in principal, after five years of mortgage payments. In addition, you will likely have paid between $10,000 and $20,000 in maintenance and repair to earn that equity.

Chances are you could earn more than this in a number of investments that are more diversified and less risky than putting all of your eggs in one basket. For more information on Diversifying Your Portfolio by Renting, see that blog post, which discusses the rent vs own debate from an investment perspective.

For more information, check out the full Rent vs Buy article, which can be found at the MyNewPlace Apartment Guide.

Check back next week when we will feature Myth #3, “My Mortgage Will Be Less than My Rent.”

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