Don't Just Pay Rent, Build Wealth: Consider Home Equity

By Gray Group

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Is it better to rent or buy a home? I often get asked this question, so today I’m going to give you some insights on one factor that gets overlooked during the decision making process, which is home equity.

Recent reports have emphasized that renting is much more affordable than buying, especially when you consider the monthly payments alone. However, reports fail to mention one important aspect of homebuying, which is home equity. Equity can have an impact on your financial situation and is worth considering when weighing the pros and cons of buying versus renting.

Data on the median rental payment from Realtr.com and the median mortgage payment from the National Association of Realtors (NAR) shows that renting may appear more affordable on a monthly basis, particularly if you’re not seeking a large living space.

However, the affordability equation varies depending on factors such as location, home size, and condition. As the saying goes, the devil is in the details, so it’s essential to scrutinize the specifics closely.

When you rent, your monthly payments solely cover housing costs but offer no opportunity for wealth accumulation. Conversely, buying a home allows your monthly mortgage payment to serve as both a shelter and an investment. That investment grows equity as you make your monthly mortgage payment, chip away at what you owe, and build equity. Moreover, as home values appreciate—typically at a 3% to 5% or even 6% rate annually—the equity in your home receives a significant boost.

Each quarter, Fannie Mae and Pulsenomics publish the results of the Home Price Expectations Survey (HPES), and the survey reveals optimistic projections for future home prices. According to experts, home prices are expected to continue rising over the next five years, further enhancing the potential for equity growth.

To show you how equity gives you an advantage, consider this scenario: Suppose you purchase a home for $400,000 and remain there for five years. Based on projected home price appreciation, you could potentially accumulate over $83,000 in household wealth through equity growth alone. While renting may offer short-term savings on monthly payments, it pales in comparison to the long-term wealth-building potential of homeownership.

But at the end of the day, the choice of whether to rent or buy depends on your financial situation. It is important to align your financial goals and capabilities with your spending. However, if you are ready and able, buying a house and taking advantage of equity could offer greater control over your financial future.

If you are interested in capitalizing on long-term home price appreciation and building wealth through homeownership, reach out to us. Call, text, or email us to learn about your options.