Equity Factors Into The Decision To Buy Or Rent

Owning a home makes it easier to build wealth

February 20, 2017

Rising home prices and mortgage interest rates have made the choice between buying a house and renting an apartment more of a toss-up. But, it seems that people on the fence might not be factoring in equity.

Jonathan Smoke, the chief economist of Realtor.com, argues that a monthly mortgage payment is a bit like a forced savings plan. A percentage of the mortgage goes towards home equity, and the portion gets larger with time: In the first year, only 29 percent might go towards equity, but by the final year of a 30-year fixed rate mortgage, 98 percent of it will.

Renters don’t have this option, nor do they have the upside of having a fixed payment rate every month (rents fluctuate, monthly mortgage payments stay the same).

This is unmistakable evidence that homeownership is a critical building block of household wealth. Owning a home is a key reason why the median net worth of a homeowner is almost $200,000 while the median net worth of a renting household is just over $5,000.

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