You might have come across news articles mentioning that renting is currently more cost-effective than purchasing a home. While this could be accurate based on monthly expenditure alone in certain areas, there's a crucial aspect that often goes unnoticed: home equity. Let's delve into the significant influence equity can have and why it should factor into your decision-making process.

What the Headlines Are Based on

Let's take a look at this graph that compares the median rental payments from Realtor.com with the median mortgage payments from the National Association of Realtors (NAR). Based on the data, if you're not in need of a large space, renting might actually be more budget-friendly on a monthly basis.

If you're on the hunt for a place with 2 bedrooms, you'll notice that the difference between the average rent and the average mortgage payment begins to decrease, making it a more feasible option. For 2-bedroom homes, the typical monthly mortgage cost is

How Equity Changes the Game

If you rent a place, your monthly payments just cover the cost of living there and your landlord's expenses. Besides potentially saving a little more each month and possibly getting your security deposit back when you leave, the money you use for housing every month is essentially gone – forever.

When you purchase a home, your monthly mortgage payment not only covers your living expenses but also serves as an investment. This investment builds up through equity as you pay off a portion of your mortgage each month. Additionally, your equity benefits from the appreciation of home values over time, which usually happens.

Just to give you a better picture of how quickly equity can grow, here's a quick rundown: Every quarter, Fannie Mae and Pulsenomics release findings from the Home Price Expectations Survey (HPES). They ask over 100 experts, including economists, real estate pros, and market strategists, about their predictions for home prices. The latest report shows that these experts foresee home prices continuing to rise in the next five years.

Here's an example of how equity grows over time, as shown in the projections from the HPES chart.

So, let's say you bought a house back in January for $400,000. If you're in it for the long haul, considering hanging around for about 5 years might be a smart move. According to our predictions, your home's value could increase enough for you to potentially pocket more than $83,000 in wealth by then. Not too shabby, right?

Here's a comparison to renting using the overall median rent mentioned earlier:

While renting might offer some savings on your monthly expenses, keep in mind that you won't be building equity in a property.

What's the main point here? Deciding between renting or buying really depends on your individual financial situation. If the math doesn't add up in favor of buying, it's probably best to hold off. However, if you're financially prepared and capable, building equity could be the missing piece that tips the scales towards buying being a smarter choice in the grand scheme of things.

Bottom Line

Buying a home has a perk that renting doesn't - the opportunity to build equity. If you're interested in tapping into the potential for your home's value to increase over time, let's chat about your choices.