During my divorce journey, I grappled with the question of whether I could afford to buy a home or if it would even be a sound financial decision. I explored both renting and purchasing options to assess my monthly expenses and long-term financial outlook.
With a teenage son and a preteen daughter, I needed at least three bedrooms, which significantly narrowed my choices, especially for rentals. Upfront costs for buying a home were notably higher than renting. To buy a property priced around $180,000, I would need $36,000 for the down payment and a few thousand more for closing costs. In contrast, renting a three-bedroom place, starting at $1,500 per month, required an upfront payment of about $4,500 for first and last months’ rent plus a security deposit.
Renting Doesn’t Build Wealth
However, renting would be much more expensive on a monthly basis—about 50% more. A $180,000 home with a 20% down payment would result in a mortgage payment, including property taxes and homeowners insurance, of only $1,040 per month, while the cheapest rental was $1,500.
While owning a home comes with ongoing expenses, some analyses state that renting can be “cheaper.” I disagree for two reasons. Firstly, a portion of my mortgage payment contributes to the principal of my home, building equity that I could recoup upon selling. The longer I stay in my home and make payments, the more equity I accumulate due to amortization. Conversely, every dollar spent on rent enriches someone else; I never recover any of it.
Secondly, many rental-versus-buying analyses overlook the return on investment after five years of homeownership and the profits gained upon selling. Ultimately, owning a home is one of the most dependable methods to accumulate wealth, acting like a savings account with interest. Renting represents a significant opportunity cost, especially as rental prices continue to soar.
The Cycle of Renting
The reality is that maintaining a roof over one’s head—whether rented or owned—is becoming increasingly costly. Reflecting on my own situation, if I hadn’t been able to make that down payment, I might have found myself stuck in a perpetual renting cycle. With exorbitant rent, there would be little left over each month to save for a future home. Many Americans are trapped in this same predicament, denied the upward mobility typically associated with homeownership.
The myth we are sold is that young individuals can rent affordably while saving for a down payment. However, how can someone save when all their earnings are funneled into an overpriced rental? Adding children into the mix complicates things further.
Given my income, if I were forced to rent, I’d be left with mere hundreds of dollars each month, taking potentially 15 years to save enough for a down payment. However, by then, housing prices would have likely increased, requiring more than I would have needed just a few years prior. In fact, if I attempted to buy my current home today, I would need almost $6,000 more for the down payment and an additional $175 in monthly mortgage costs.
It’s baffling how anyone is expected to save for a 20% down payment when renting often costs 50% more than buying. Just check out Zillow for confirmation; the rental premiums across the board effectively hinder any chance of saving.
Moreover, because of the rental premium and the ability for property owners to earn more from short-term rentals through platforms like Airbnb, investors are outbidding first-time buyers, snatching up affordable homes. They often flip these properties for a profit, further driving up prices and making it even more difficult for first-time buyers to enter the market.
This is a significant issue contributing to the widening wealth gap. Escalating home and rent prices mean that, without financial assistance from family, many individuals will remain trapped in a cycle of barely affording rent, let alone saving for a home.
The only reason my ex-spouse and I could purchase our first home back in 2008 was that we lived rent-free with a kind cousin for a year, enabling us to save up $25,000. That year set the foundation for our financial growth. We later sold that house for a significant profit, and the equity from that investment helped us buy our current home. Living rent-free was a pivotal moment in my journey to homeownership.
Unfortunately, millions of Americans lack that kind of support. This is a critical issue that often goes unaddressed. Housing is a fundamental human need. While we focus on rising healthcare costs and educational inequities, countless Americans are being priced out of the basic necessity of shelter.
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Summary
The struggle to build wealth through homeownership is increasingly complicated by the high costs of renting. Many individuals find themselves trapped in a cycle where exorbitant rent prevents them from saving for a down payment on a home. This issue contributes to the growing wealth gap and underscores the need for dialogue about affordable housing solutions.