Buying a Home or Renting: How to Best Leverage Your Savings?

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Photo illustration: Topp Yimgrimm

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Interest rates are approaching record lows, which begs the question: What should you do with your savings?

The chair of the Federal Reserve wants to see the inflation rate at 2%, but if it inches higher, he is not particularly concerned if the economy is growing and creating jobs. But with savings account interest rates lower than inflation, you are losing money every day in terms of purchasing power. The stock market has been very attractive in some industries, but many wise investors are being careful, bracing for a serious recession even after a vaccine is distributed. So, one question some people are asking is: Should I buy a home or continue to rent?

Americans have always felt that part of the American Dream was being a homeowner, having a real stake in the community. Most Americans built a big share of their net worth through the appreciation of their home. Homeownership was promoted in various ways by the government including institutions that purchase mortgages from financial institutions. This secondary market for mortgages lowers the risk for these institutions making 15 or 30-year loans at relatively low interest rates and freeing up money so these lenders could continue to make housing loans.

Then, the great financial recession of 2008 hit, and people watched friends or family members lose their homes when they couldn’t continue to pay their mortgages. Property values dropped, and many people were underwater on their home, meaning that they owed more to the bank than the property was worth. Homeownership began to lose its luster for some people.

Now that we are 10 years past the great recession, some people continue to debate whether it’s a smart investment to buy a home. Bank or credit union savings accounts that are not locked in for multiple years are paying less that 1% interest. Stocks are selectively doing well, but the uncertainty in the market is very real. So, it comes back to the question, should I buy a house or condo, or should I continue to rent? Assuming you have the money for a down payment, usually 20%, does it make sense to invest that money in homeownership?

The following will provide you with arguments for purchasing a home followed by arguments for continuing to rent. It’s your money, so you decide. There is no right answer.

Reasons to Consider Buying a Home

• First, a home purchase is more than just an investment. It provides you with a place to live where you have some control over your life. For many people, it makes them feel more integrated in their community and gives them a greater sense of well-being.
• Historically, if you purchase your house in a community where most people own their homes and where they properly maintain them, you will probably have solid appreciation over the long term.
• Your mortgage is usually a fixed-rate 15- or 30-year loan. If you have no prepayment penalty on your loan, you can refinance your property if interest rates fall significantly and lock in at a low rate for the next 15 or 30 years. With a fixed-rate mortgage, your monthly principal and interest will not change, whereas with rent, it continues to increase over the long term. After 10 years, your monthly mortgage will be the same amount as it was when you borrowed the money, whereas your rent may have doubled depending on the inflation rate and the relative demand for apartments in your area. Unlike rent, your mortgage is eventually paid off.
• You build equity in your house as it appreciates in value and as you pay down the principal on your mortgage, enabling you to borrow against that equity at a relatively low interest rate to cover unplanned medical bills or college tuition.
• You can leverage your money. Most lenders require a 20% down payment and will lend you 80% at a fixed rate. Let’s assume you purchase a $200,000 home with a $40,000 down payment. Now, assume that inflation is running at 2% per year. After one year, if you had your money in an investment instrument where you earned 6% return, your $40,000 is now $42,400. Assuming you bought a home and it increased in value just equal to the 2% inflation rate, the value of your home is now worth $204,000. Without including the amount that you paid down on your mortgage, your net worth went up $4,000 in nominal terms, whereas with your 6% return on investment, your net worth went up only $2,400. You essentially used your lender’s money to benefit from inflation.
• You can remodel and expand your living quarters to suit changes in your life or lifestyle and increase the value of your home. You can also spend your free time making your basement into a recreation area and again increasing the value of your home. 
• Finally, if you pay your mortgage and your taxes, no landlord can evict you so their brother-in-law can rent your apartment.

Reasons to Consider Renting Rather than Buying

• You can shed off responsibility: There is a landlord or management company that takes care of the repairs and the upkeep on the property. You don’t need a lawnmower or snow shovel.
• You are safe from unexpected major financial hits such as a roof replacement or the need to purchase a new furnace or air conditioning system.
• You can enjoy a high level of mobility, especially if you have a month-to-month lease to accommodate your future life plans. If you are uncertain about your employment, you are considering going back to school or you met your true love online who lives in a different city, when your lease expires, you can start packing. Because of the various costs associated with purchasing and selling a home, it seldom makes sense to buy unless you plan to live there for at least three years.
• You believe you can make more money by investing in something else, whatever that might be.

Again, there is no right or wrong choice. The best choice is the one that fits your needs at this time.

Louis Fortis is a development economist by training and has taught graduate courses in Community Economic Development at UW-Milwaukee.