Up until 2022, it was easier to decide between buying a home or renting. Although home prices were rapidly increasing, low interest rates meant lower mortgage payments—often far lower than rent for an apartment.
Today, with significantly higher rates, the equation has become a little more complex.
First, median home values surged 31% between January 2020 and October 2023. Second, the Federal Reserve made a series of rate hikes beginning in 2022, resulting in a steep climb of almost five points over a very short period. Yet at the same time, according to PNC Bank Head of Mortgage Peter McCarthy, affordability for many prospective buyers remains within reach.
“A lot of would-be buyers are getting their clues from sound bites on television or what they read on social media. Instead, if you’re seriously considering making the move into home ownership, the person you should consult is a mortgage professional – someone who can review your credit score, really explore your current financial status, and make an informed recommendation.”
Where and when does it make sense to buy versus rent? There are lots of variables to consider, both personal and financial, including your income, your location, and your credit score. Here are some factors to consider as you make your decision.
Your Lifestyle Matters.
The first, essential question is less about dollars and cents, and more about life goals. Do you want to own a home? And, why?
Maybe it’s a matter of needing room for you and your family. Maybe it’s the intangibles that are important, a sense of ownership, or the desire to put down roots.
“Home ownership connects you to a place in a way that being a tenant never really can. This is especially true in neighborhoods that are close-knit. Simply put, there are times when it’s less a financial decision and more a decision of the heart,” McCarthy offers.
On the other hand, you may see relocation as a possibility in the near future to pursue an opportunity. In those situations, renting provides more flexibility when it comes time to relocate.
Or, as another consideration, a home requires care, whether it’s the yard or the weekly chores to keep a property in tip-top shape. For some, that ongoing effort is a labor of love. For others, it cuts into valuable free time they would rather spend doing other things.
“Some prefer the convenience of making a phone call to the landlord rather than fixing it themselves or hiring a professional,” McCarthy points out. “To them, that convenience outweighs the financial considerations.”
Location Matters, Too.
If you read the news, it’s easy to think that home prices are out of reach. However, affordability is very much a function of where you live.
“There are markets where supply is unusually tight at the moment,” McCarthy continues. “In those locations, many buyers are chasing relatively few properties. As a result, the Law of Supply and Demand drives home prices up in those markets. Elsewhere, there are markets where home prices remain affordable for many.”
At the same time, there are glimmers of hope for the overall market. Through a combination of low interest rates and high demand, home prices rocketed from 2020 through 2022. However, there are hints that prices might be starting to moderate. Between the end of 2022 and September 2023, median sale prices for homes fell by almost 11%.
“There’s no clear picture on whether this signals a trend of home prices reverting to the mean or not,” McCarthy continues. “However, what this data does tell us is that prices do not always move upwards on a constant trajectory. If you’re not quite ready to purchase, then, it makes sense to keep an eye on prices as market conditions continue to fluctuate.”
What Affects The Numbers?
If you’re weighing the possibilities of buying a home, it helps to take a look not just at the short-term, but how the finances work over the long haul. McCarthy advises looking at your overall costs in a holistic way—and as part of an overall wealth-building strategy.
“The first question I always ask is this: What are you paying in rent? That’s your baseline. But, just as importantly, what will you be paying in rent next year? And the year after that? And the year after that? Because one thing is for certain: While a fixed mortgage rate means your payment will be the same year-after-year of a 15- or 30-year term, your rent will continue to go up every time you renew your lease.”
Further, McCarthy adds, if interest rates go down, you can lower your mortgage payment by refinancing. At the same time, there are other factors such as mortgage interest tax deductions that could influence your decision.
“As one example, people don’t realize the tax advantages to paying a mortgage versus paying rent. If you’re purely about the numbers, make sure you’re factoring in the considerable tax deductions that come with paying mortgage interest.”
Even so, it’s important to look at the entirety of costs associated with owning a home. The expenses run the gamut from property taxes to maintenance and insurance. That’s when McCarthy offers that a face-to-face conversation with a mortgage loan professional can answer a lot of these questions.
“We constantly reinforce continuous education among our mortgage teams. That includes programs and grants that might be available to low- and moderate-income borrowers. As a result, people are very often surprised at what they can truly afford. And it’s always better to fully understand the numbers. That way, you know for sure if a home purchase makes financial sense.”
Which Option Builds Wealth?
A mortgage payment may or may not be comparable to your monthly rent. However, what could really make the difference is the long-term effect on your overall net worth. As McCarthy notes, the difference could be profound.
“If you purchase wisely and keep your property in good shape, your home will most likely be an appreciating asset over time. That mortgage payment really goes towards increasing your wealth—not just rent going into the landlord’s pocket.”
One other factor? As a home grows in value, so does your equity – the difference between the home’s value and the balance of your mortgage. That equity, if used properly, can become a valuable financial tool for major purchases or consolidating other forms of debt.
As McCarthy points out, “Once you’re in a home and its value rises over the course of several years, your home becomes more than an asset. It can be an important resource to create additional wealth, to make smart investments, to start your own business, or any number of other possibilities. That’s something that you simply cannot rely on when renting.”
There are many considerations when it comes to choosing between renting and buying. However, if you’re on the fence, there’s one constant bit of wisdom. It pays to fully explore the possibilities. Once you have a full understanding of your options, the answer may surprise you.
How to Get a Mortgage Loan: Key Steps Homebuyers Should Know | PNC Insights