{"id":16300,"date":"2020-05-06T10:47:43","date_gmt":"2020-05-06T17:47:43","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=16300"},"modified":"2021-12-15T14:48:21","modified_gmt":"2021-12-15T22:48:21","slug":"buyer-is-mortgage-like-rent","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/buyer-is-mortgage-like-rent\/","title":{"rendered":"Is Mortgage Like Rent? Everything You Need to Know"},"content":{"rendered":"

If you\u2019re debating whether to buy a house or rent, you have probably wondered \u201cis paying a mortgage<\/a> like paying rent?\u201d The answer is \u2014 both yes and no.<\/p>\n

If you\u2019ve never had a mortgage, then you might find the differences between the two confusing. Let\u2019s break them down so you understand how paying a mortgage is both different from and similar to paying rent.<\/p>\n

\"A<\/a>
<\/a> Source: (Joseph Cortez \/ Unsplash)<\/figcaption><\/figure>\n

The big similarity<\/h2>\n

Whether you\u2019re paying a mortgage to a bank or rent to a landlord, your monthly payment is covering your housing costs, which is what you pay to have a roof over your head.<\/p>\n

Beyond allowing you to live indoors, there are several important differences between paying rent and paying a mortgage. These differences include:<\/p>\n

Upfront costs<\/h2>\n

Renting<\/h3>\n

When you\u2019re renting, whether it\u2019s a house or an apartment, you\u2019ll have several upfront rental costs<\/a>. You\u2019ll generally need to pay a security deposit, which is usually equal to one to two months of rent. You may also need to pay for application fees and a credit check. You should also get renter\u2019s insurance if you\u2019re going to protect yourself at the same level a homeowner would.<\/p>\n

If you own pets, your landlord may ask you to pay a pet deposit to cover any additional damage typically caused by pets.<\/p>\n

If everything is in good condition when you move out, you should get your deposit(s) back. The application fees and credit check expenses, however, will not be returned.<\/p>\n

Buying<\/h3>\n

If you\u2019re buying a house, you will have to invest substantially more upfront. Your down payment<\/a>, for example, can be up to 20% of your house\u2019s entire value, although that is rare. The average repeat homebuyer had an approximately 16% downpayment, while the average first-time buyer had approximately a 6% downpayment, according to the National Association of Realtors 2019 Profile of Home Buyers and Sellers<\/a>.<\/p>\n

On a $200,000 house, that\u2019s a minimum of $12,000, and possibly up to $40,000 you\u2019ll need to have on hand just for the down payment.<\/p>\n

If you\u2019d like to learn more about down payments and mortgage payments, you can do so using the HomeLight Down Payment Calculator<\/a>.<\/p>\n

And a down payment isn\u2019t the only ready cash you\u2019ll need to have when buying a house. As a buyer, you\u2019ll also need to pay for the appraisal and inspection fees<\/a>. Appraisal fees can be as little as $300 or as much as $1,000 while inspection fees tend to range from $300 to $500 but can be more or less depending on where you live.<\/p>\n

You\u2019ll also need to pay for the closing costs<\/a>. These costs can include mortgage application and origination fees, which average out to between 1% and 2% of the loan amount, plus title and settlement fees, which can add up to another 2% of the loan amount.<\/p>\n

Length of the rental\/mortgage agreement<\/h2>\n

Rental agreements can range from one month to multiple years, depending on the landlord and the tenant\u2019s agreement. As a renter, you have the ability to negotiate the length of your lease to suit your needs and circumstances.<\/p>\n

You also have some flexibility as a homebuyer, as your mortgage lasts as long as the term of your loan. While a 30-year mortgage loan is the most common, you can also choose to get a 20-year, 15-year, or 10-year mortgage loan. Some lenders also offer mortgage loans with different, customizable terms.<\/p>\n

While it\u2019s possible to get a shorter-term mortgage, Tobin Bossola<\/a>, a top-selling Jacksonville real estate agent<\/a> with more than 14 years of experience, advises against it. He explains that \u201cunless you’re in a unique circumstance where you know you’re buying well below your means, I would encourage someone to take a 30-year mortgage out and then make every effort to pay additional amounts monthly to equal about an extra mortgage payment a year, which does drastically reduce your thirty-year mortgage timeframe.\u201d<\/p>\n

Being a renter gives you more flexibility to uproot and move, whether it\u2019s across town or across the country. As a homeowner, you will have less flexibility to relocate. Mortgage agreements are also far more binding than rental lease agreements. You aren\u2019t stuck forever as a homeowner, but rental leases are easier to end than a home is to sell.<\/p>\n

\"A<\/a>
<\/a> Source: (Roger Starnes Sr \/ Unsplash)<\/figcaption><\/figure>\n

What\u2019s included in each payment?<\/h2>\n

Rent<\/h3>\n

Your rent generally includes only the price you pay to rent the home or apartment, but some rental agreements will include some of all of your utilities as part of that flat monthly rent payment. This may depend on the location or landlord.<\/p>\n

Some landlords may ask for an extra monthly fee for pets. This can be in addition to or instead of a pet deposit.<\/p>\n

Mortgage<\/h3>\n

Your mortgage payment generally includes your principal and interest payment \u2014 or, if your payment includes impounded taxes and insurance (which is most common), it will cover your full PITI, an acronym for principal, interest, taxes, and insurance, averaged out over 12 months. Depending on your down payment, you may be required to pay mortgage insurance (MI) <\/a>\u00a0in some form, which will also become part of your mortgage payment.<\/p>\n

The MI helps cover the lender should you default on your mortgage, but it doesn\u2019t cover you as a buyer should you lose your job or be otherwise unable to make your mortgage payments on time. Some mortgage loans will automatically cancel your MI once you reach 20% equity in the home, but if you are putting less than 10% down on an FHA loan<\/a>, your MI will stick around for the lifetime of the loan.<\/p>\n

In addition to these components of the mortgage payment, some neighborhoods require you to pay homeowners association (HOA) dues<\/a>, which is not something renters typically pay for. HOA dues cover neighborhood amenities like playgrounds and pools, which renters can use. Sometimes these are paid with the mortgage, and sometimes separately.<\/p>\n

As a homeowner, you will also be responsible for all home maintenance. This can mean everything from fixing the roof after a hailstorm to cutting down dying trees to fixing or replacing broken appliances. While your homeowner\u2019s insurance<\/a> may cover the hail damage, you\u2019ll have to cover ongoing maintenance costs, which are not included in your mortgage payments. It\u2019s a good idea to set some money aside for these expenses, which will often feel like surprises.<\/p>\n

Tax benefits of homeownership<\/h2>\n

There are several tax benefits of homeownership<\/a> that are not available to renters. For example, as a homeowner, you are allowed to deduct your mortgage interest on your taxes<\/a>.\u00a0 You are also allowed to deduct your property taxes on your federal income taxes.<\/p>\n

CreditKarma explains that while the residential moving cost deduction on a federal level is no longer available to nonmilitary homeowners, some states still allow you to deduct moving expenses from state income taxes<\/a>. If you install solar panels on your home, you may be able to deduct up to 30% of the cost, including installation, from your taxes \u2014 but only if you own your home.<\/p>\n

If you have a home office, the IRS allows you to claim tax deductions<\/a> for using that space for your business. (You can do this as a renter in some circumstances, too, but the rules around it aren\u2019t as clear-cut.)<\/p>\n

As Krystal Pino, CPA, PFS, Founder of Nomad Tax<\/a>, explains, \u201cThe main benefit of investing in a home remains the ability to sell that property and not be taxed on gains up to $250,000 for single filers, $500,000 for married filing jointly.\u201d Homeowners can also benefit from tax deductions for mortgage interest<\/a>, property taxes, points on mortgages and MI.<\/p>\n

These are all financial benefits that are not available to renters.<\/p>\n

Equity<\/a> vs. rent: what you get when you move out<\/h2>\n

As a renter, you may or may not get your security or pet deposit(s) back when you move out. It will depend on the condition of your apartment or house rental.<\/p>\n

As a homeowner, you are likely to make a decent amount of money back on your home when you sell. How much you make will depend on how long you\u2019ve lived there and how much equity you have in your home, as well as how the local housing market is doing when you decide to sell.<\/p>\n

For example, Bossola explains that for a typical homeowner in 2020 who has held their home for five to seven years is probably looking at making around 20% on appreciation on their purchase price. So with 20% appreciation, a home that was worth $200,000 five to seven years ago is now worth $240,000.<\/p>\n

\"A<\/a>
<\/a> Source: (Amin Hasani \/ Unsplash)<\/figcaption><\/figure>\n

Payments can be more stable over time with a mortgage if you choose a fixed-rate interest option<\/h2>\n

A landlord can raise the rent any time you sign a new lease, and how much they can raise it will depend on the local rental laws and property type. Some renters have been surprised by their rent increase when it comes time to renew their leases.<\/p>\n

Regardless of where you live and the type of housing you rent, you should expect at least an incremental increase with each new lease, as often landlords or owners will increase rent to accommodate inflation and other increases in operating costs. Rent increases are why many renters looking to stay put for the long-term opt for two-year leases \u2014 or however long the landlord is willing to offer.<\/p>\n

Even with a fixed rate of interest<\/a> on your mortgage, your housing payment may go up slightly over time due to increases in taxes and insurance payments \u2014 if you are paying taxes and insurance with your mortgage. However, the increase should be small each year. If you haven\u2019t maxed out how much you can spend on a mortgage payment down to the penny, you should be OK despite the incremental increase.<\/p>\n

The best way to ensure your mortgage interest rate is low is to have excellent credit<\/a> when applying for your mortgage. While how much you can get in terms of dollars for your mortgage is tied to your job and how good it is, your mortgage interest rate is tied to your creditworthiness.<\/p>\n

To find out more about whether homeownership or renting is a better fit for you, check out our article When Does It Make Sense to Own vs. Rent Your House?<\/a><\/p>\n

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