Mortgage Or Rent Which Is Better

Running Head: MORTGAGE OR RENT: WHICH IS BETTER? 1

Mortgage or Rent: Which is Better?

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Running Head: MORTGAGE OR RENT: WHICH IS BETTER? 2

Mortgage or Rent: Which is Better?

Deciding where to live is one of the most important decisions of early adulthood. Once

the decision over which city to settle in has been made, one faces the question of what living

arrangement they should choose. Unless one comes from a wealthy background, that decision is

reduced to choosing between taking a mortgage or living in a rented apartment. A mortgage is a

loan extended by a financial institution to purchase a house. Typically, mortgages are long-term

loans extending to more than ten years. Renting involves leasing a house or an apartment for a

limited amount of time, say for a year. When you compare the financial costs, mobility, and

alternative investments, renting is a better option than taking a mortgage.

When compared to renting, taking a mortgage is a costlier alternative. The biggest

financial cost of taking a mortgage is the deposit, which the borrower must make to qualify for a

mortgage. The borrower also has to contend with interest payments, which increase the cost of

the mortgage. When compounded over a long time, say over fifteen years, the interest payments

can add up to a huge sum of money. According to the US Mortgage Corp (2015), homeowners

have to deal with other costs such as repairing and maintaining the house. In addition,

homeowners have to pay property taxes. A renter has no responsibility to repair the house. The

renter also experiences lesser financial strain since they pay rent for a few months at a time.

There is also the financial cost of depreciation that homeowners face in case there is an economic

downturn. The homeowners might see their investment plunge in value over time if the economy

in the area sours up.

Renting offers more possibility for mobility than a mortgage. There is no guarantee that

someone will want to stay in the same place all their life or even for a long time. The economy in

an area might deteriorate leading to job losses and general social problems in the area.

Running Head: MORTGAGE OR RENT: WHICH IS BETTER? 3

Alternatively, attractive opportunities might emerge in a distant city. In such a case, renters will

just pack their things and move on to the next city where there are opportunities. Homeowners

do not have the luxury of moving on a whim since they cannot just abandon their property. Due

to the financial strain of paying the mortgage, they might also not abandon their house and move

to a rental residence in a new place (unless they can lease their home to a tenant). The inability of

homeowners to move when needed might lead to lost opportunities.

Taking a mortgage rather than renting is an investment decision with near-zero returns in

most cases. It is important to note that taking a mortgage is an investment decision while renting

is not an investment decision. While taking a mortgage, the borrower sinks a huge initial cost and

commits to pay monthly installments. Unlike other investment decisions that produce periodic

profits, a home will never turn a profit unless it is sold. Even then, there is no guarantee that it

will turn a profit. Renting frees up the tenant to consider other investment decisions that are more

profitable. For instance, Tepper (2017), notes that a typical condominium goes for around

$350,000; this is in addition to a 3.7% interest, payable over 15 years. The homeowner has to

sink 20% of the cost ($70,000) as a deposit. Arends (2013) explains that the average portfolio

return in the USA is 9.7% per annum. If the same amount of money is invested in portfolio

starting with a $70,000 lump sum and then making similar annual installments to the mortgage-

taker, the portfolio will have grown to $916,000 in 15 years. In contrast, the home appreciation

rate is usually below 5%.

The decision on whether to take a mortgage or to rent boils down to three factors: cost,

mobility, and alternative investment. The financial cost of a mortgage and the cost of

maintaining a home is higher compared to that of renting. Renting also offers the tenant mobility

to pursue attractive opportunities in new place. In addition, taking a mortgage ties up significant

Running Head: MORTGAGE OR RENT: WHICH IS BETTER? 4

amounts of income that may be invested elsewhere to produce a greater return. In conclusion,

renting is a more attractive option when compared to taking a mortgage.

Running Head: MORTGAGE OR RENT: WHICH IS BETTER? 5

References

Arends, B. (2013, June 28). Why ‘average’ returns aren’t good enough. Market Watch. Retrieved

from https://www.marketwatch.com/story/why-average-returns-arent-good-enough-2013-

06-28 on February 5, 2018.

Tepper, T. (2017, February 13). Buying a home is a perfectly fine decision. It's just not a

financial one. Time. Retrieved from http://time.com/money/4655469/rent-vs-buy-

mortgage-millennials/ on February 5, 2018.

US Mortgage Corporation. (2015). Renting vs. buying a home. Retrieved from

https://usmortgage.com/wp-content/uploads/2015/03/Renting_VS_Buying.pdf on

February 5, 2018.

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