My friend, Shireen, bought her awesome Park Slope one-bedroom co-op apartment eight years ago for a little under $300,000 and learned recently that it would now go for around $800,000.

When we hear stories like this we always assume that this is someone who did something very special to get these types of returns. Yet, I remember how difficult this choice was back then — to buy what was then an expensive place versus continuing to rent.

The arguments for buying versus renting back then are the same as they are now. First of all, in most markets, over time the amount of money a person spends on rent is about the same as or less than the amount a homeowner spends on a mortgage. When you first purchase a home, the mortgage payment covers mostly interest. As time passes, more of each payment goes toward paying down the balance or principal of the loan itself.

I remember how difficult this choice was back then — to buy what was then an expensive place versus continuing to rent.

 

So every mortgage payment is a form of savings because it increases the amount because it increases the amount of your home that you own, known as the “equity” in your home. Renters are not able to build equity with their monthly payments.

Also, if you make a 20% down payment, and secure a long-term fixed-rate mortgage (ideally 30 years), you will have the same payment month after month, year after year. This provides a sense of stability that a renter does not have. Rents are often increased every time the cost of living goes up.

I helped Shireen run the numbers and we knew she could afford to buy. It was not so special what she did, just prudent. Now eight years later, her hard work is paying off. Sort of. In fact, she is much better off continuing to live in this apartment for now, so the gains are only “on paper.”

1 thought on “Rent vs Own”

  1. Even if you can’t afford 20% down, you can always refinance at some point, namely when you have 20% equity.

    We bought our second house 5 years ago and have refinanced twice since then. We went from a 30 year mortgage to a 20 year to 15. It’s smart to do an annual check up on your mortgage, you may find some savings.

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