“Renting is throwing your money away”.  This axiom of American culture persists in spite of the Housing Collapse.  The Government and media continue to be hell bent on nudging every American, regardless of income, into pursuing the “American Dream” and getting their “piece of the real estate pie”. 

That’s what renters at Avalon Communities’ Mountain View apartments (Mountain View Apartments) believed until they calculated the true cost of home ownership. 

Using real world, Pacific Northwest housing data, we can contrast the financial benefit of renting vs. buying.

For the purpose of this case study we located the following equivalent housing units in the same neighborhood:

A 3-bed, 2.5-bath, 1,840 sq ft house with an attached 2-car garage, on 0.2 acres.  Monthly rental price: $1,495.
A 3-bed, 2.5-bath, 1,850 sq ft house with an attached 2-car garage, on 0.22 acres.  Price to own: $424,950.

We assume that our hypothetical homebuyer is “a married couple with the ability to make a 20% down payment”.  To calculate mortgage payments we assume the use of a traditional fixed loan at the recently available, 30-year rate of 6.25%.

Let’s analyze the relative monthly costs for our hypothetical, potential first-time homebuyer:



Choosing to own, versus renting, results in a 78% higher cost of housing.  Should our hypothetical couple opt to upgrade their living circumstances even slightly, it is not difficult to imagine that total monthly housing costs could more than double.

Even the layman or real estate novice should appreciate that in the face of such a huge premium that buying a home is a not a sound financial decision. 

An all-to-common response to this dose of financial reality, though, is “at least homeowners are not throwing away their money on rent”.  The renter in our scenario does spend $1,515 every month that they will never see again. 

But when you breakdown the homebuyer’s monthly costs, a large amount of this expense is money that will also never return.  Insurance, net property tax, and maintenance add up to $517 every month that is being “thrown away.”  Even worse is the amount spent on mortgage interest. Consider how much of a monthly mortgage payment is applied toward loan interest throughout the life of a 30-year fixed loan:



In the early years of homeownership, approximately 80% of the mortgage payment is applied towards servicing the loan’s interest. That’s an additional $1,674, for a total of $2,191, being “thrown away” every month by the homebuyer for the first five years.  It is not until the homebuyer has been paying down the mortgage for over 20 years that the amount they “throw away” each month will be less than the expense born by an equivalent renter.

For most people, a home is the biggest purchase and most important financial decision that you will make in your life.  It is your largest monthly expense.  Don’t be swindled by imagined financial benefits.  It is difficult to quantify the pride of ownership and the benefits that can come from owning a house, but make sure you’re looking at the whole picture before making a decision.  Every person’s situation is different, but for many, buying a home won’t necessarily save you money, be a sound financial decision or prove to be a profitable investment.

Richard Hubbard