Knowing the Difference Between Mortgage vs. Rent
Are you currently in the process of making a decision between a mortgage or rent but you’re confused about choosing the right option? No need to stress! The real estate experts at Brookings Home Team are here to help. In this article, our experts will explore the differences between mortgage versus rent, and which option could prove to be more beneficial for you depending on your circumstances.
What Is Rent?
Renting is when you live in a place that is lawfully owned by someone else, but you pay a certain amount of money—known as the rent—for the said living space. While renting a house or apartment you are in contract with the landlord for a certain period of time. The landlord also has the right to increase your rent by a pre-decided percentage after a set amount of time has passed.
What Is a Mortgage?
A mortgage itself is a loan that a person takes to buy a house. This amount has to be paid back over a defined period of time. Mortgages are mostly made through pre-determined payments at regular, agreed-upon intervals. When buying a property through a mortgage, the house serves as collateral for the loan until you’ve fully paid off the mortgage.
Key Differences of Buying and Renting
There are several key differences between renting and a mortgage. In this section, we will outline these two types of payments, the expectations that come with both, and the benefits of each one.
How Does a Mortgage Payment Work?
If you apply for a mortgage, you are required to have homeowners insurance and the insurance on your house’s belongings as well for added security. Conversely, if you are a renter living in somebody else’s dwelling, you will only have to worry about getting your personal belongings insured as the house will be covered by your landlord. This can have a significant impact on your insurance payments.
However, if you’re a homeowner who’s paying monthly mortgage payments, you can generally expect the value of your property to rise while you pay off your mortgage. This means that when the time arrives for final mortgage repayment, your property would’ve gained more value than you initially got it for. If you live in a rental property, the only thing that can possibly increase is your monthly rent. The increasing property values won’t be of any use or benefit to you since you aren’t the owner.
What Is Covered by a Rent Payment?
Unlike a mortgage, there is no lending institution or loan servicer required when you’re paying rent. If your rent is $1,200 per month, you will only pay $1,200 each month. There will be no broker fees involved. And depending on your leasing terms, maintenance and other utilities may also be covered by the property owner.
Where Does Your Money Go With Each Type of Payment?
When you rent a house or an apartment, you only pay for the right to live in that space for a specified amount of time. On the other hand, when you have a mortgage your money goes toward the eventual ownership of the house, which works as an added benefit. In a mortgage, the end goal is much more fruitful compared to renting out a place as you end up building an asset.
Which Living Scenario Is More Secure?
In the case of a mortgage, the property is technically yours. You continue paying the loans until the full value of the house has been paid off. Therefore, nobody can ask you to leave unless you haven’t been making your loan payments and the authorities have taken action against you by seizing the property. When renting, the property owner reserves the right to ask you to leave the premises, whether the contract has expired or you violated the terms of your lease agreement. In this scenario, you would have to find another place to live.
Consider These Factors Before Choosing a Mortgage or Rental Property
The decision to buy or rent are both major life decisions and there are some things that you should take into consideration.
The Real Estate Market
The real estate market is a big determining factor when it comes to renting versus buying, and a great reason to enlist the services of a professional like the Brookings Home Team. Generally speaking, the best time to enter the real estate market is while property values are low.
The Status of Your Finances
What is your current financial situation? You have to make sure that you are fiscally stable enough to afford a monthly mortgage payment. Additionally, you will have to consider your credit history and saving for a down payment, as these factors will greatly influence your mortgage terms.
Your Future Plans
Your current and future life plans will play a major role in whether you decide to rent or take on a mortgage. Renting makes sense for single individuals with no children that don’t need as much square footage. Plus, this time can be used to save for a home down payment until you’re ready to move into a house of your own.
Mortgage vs. Rent: Pros and Cons
Having a house is a necessity that feels more like a luxury now in today’s ever-growing, expensive world. Some people choose to live on rent for their entire lives while others choose to settle down by having their own home through a mortgage. To help you make this decision, the real estate experts at Brookings Home Team have put together a list of pros and cons for each living scenario.
Mortgage Pros
- Buying a house can prove to be a great investment
- You may enjoy significant tax benefits
- Safety and security of having your own house
- You have the freedom to do whatever you want with your house
Mortgage Cons
- Homeownership requires more money and responsibility
- The property can lose its value over time
- Property taxes could increase and cost you more money than renting
Renting Pros
- More flexibility and freedom in terms of moving out
- Better decision for frequent travelers
- No responsibility of property maintenance
- Can prove to be cheaper than buying an entire house
Renting Cons
- The rental property isn't your asset
- Rent value can (and will) be increased, eventually
- You probably won't be able to make any major renovations to the rental property
Regardless of your current living situation, if there's a chance you will someday buy a house, it requires knowledge about the local real estate market, strategic planning, and smart decision-making. If you’d like to get started with the homebuying process, contact our team at (605) 691-3023 to speak with a Brookings Realtor that will help guide you every step of the way.