Marry the House, Date the Rate

I’m a huge believer in homeownership. It’s a way to build equity, it’s a long-term investment, it builds your credit (as long as you’re paying on time), there are tax benefits, etc., etc., etc.

But.

It’s 2023…. and oooff this housing market is intense. Homeowners (myself included) have always touted homeownership as superior due to how much cheaper the monthly payment was than renting. However, according to an analysis done by realtor.com, it’s now cheaper to buy than rent in only three of the 50 largest US cities. Those three cities are Phoenix, Memphis, and Pittsburgh, but even then the savings is less than $100/month. Wall Street Journal says there’s never been a worse time to buy vs rent due to buying being 52% more expensive than renting.

If you’re in the process of trying to figure out the least expensive option for you, you can check out this rent vs. buy calculator to see whether it’s less expensive to rent or buy in your desired city, but I’ll give you an example of where I live.

In Nashville, if I wanted to buy a $450,000 house with a $20,000 down payment and I want my mortgage payment to be no more than $1,800/month, below is the graph that shows the difference in cost between buying (blue) and renting (yellow). As a millennial buying a house, it’s probably not going to be my “forever home,” so let’s say I stay for 3 years before moving somewhere else. In this case, renting would save me $71,222 total, or $1,978/month. If I stayed 5 years, renting would save me $88,240 total, or $1,471/month. Let’s say I’m not the average millennial and this is my forever home. I’m going to stay here for the next 30 years. In this case, renting would still be more cost effective… with the total I’d save at $123,557, and the monthly total at $343. 

Clearly renting is the cheaper option in 2023… but does that make it the better option?

Let’s look at the difference between the two… 

Renting:

Renting offers the advantage of predictable monthly housing costs clearly outlined in your lease, allowing for meticulous financial planning. Some leases may even encompass additional expenses like utilities, storage, or homeowner association (HOA) fees for condominium residents.

As a tenant, you might encounter rent hikes upon each lease renewal, with steeper increases prevalent in certain neighborhoods. However, locales with rent ceilings and rent control regulations can shield you from excessive rent escalations, providing peace of mind.

The flexibility of renting grants the freedom to relocate at the end of your lease. Yet, it also exposes you to the potential of abrupt moves if your landlord opts to sell the property or convert your apartment complex into condominiums. In less severe scenarios, they might simply raise the rent beyond your budgetary comfort.

Perhaps the biggest benefit of renting is not having to worry when your refrigerator breaks, your ceiling caves in, or a pipe bursts.

Owning: 

Homeownership also provides many benefits. It's your space to shape as you envision, instilling a sense of autonomy over design and aesthetics while fostering the pride of owning your own home.

Nevertheless, it's imperative to recognize that real estate is not a liquid asset, meaning it's not easy to convert into cash when needed. Timing the market can be challenging. The housing market's unpredictability can affect the selling price and add considerable transaction costs to the process. For instance, according to Redfin, 2023 will likely end with 4.1 million houses sold nationwide, which is the fewest since 2008. People are afraid to sell because they want to hang onto their low interest rates, and they aren’t wanting to buy new houses because of the ridiculously high interest rates.

Additionally, the financial responsibilities of homeownership extend beyond the mortgage payment. Here's a list of expenses unique to homeowners that renters generally avoid:

• Property taxes

• Waste disposal fees

• Water and sewer services

• Pest control

• Tree maintenance

• Homeowners insurance

• Insurance for natural disasters

Furthermore, it's crucial not to underestimate the financial commitment related to repairs and maintenance. Unexpected home repairs, like fixing a leaky roof or replacing it, can carry substantial costs, which might not be fully covered by homeowners insurance.

In the early years of a long-term mortgage, a significant portion of your monthly payment goes toward interest. It might take as long as 22 years before more substantial amounts are applied to reducing the principal balance on a 30-year home loan. To put it into perspective, with a $450,000 loan at 8% for 30 years, you would pay approximately $738,699 in interest, for a total of almost 1.8 million over the life of the loan, although some of this can be recouped through tax deductions, provided you can itemize. One thing to keep in mind, though, is that while rent prices will likely increase year-after-year and you have no control over this, as a homeowner you can refinance your mortgage once interest rates go down, therefore paying a lower monthly payment and less interest overall.

As a homeowner, any appreciation in your home's value translates to equity, which is your financial stake in the property. While most homes tend to increase in value over time, it's essential to remember that, like any investment, they can also decrease in value. When you decide to sell your home, you can cash in on this equity as a profit. However, you don't have to wait until you sell to leverage your equity; you can access it through various loan options, including home equity loans, home equity lines of credit (HELOCs), or cash-out refinances.

So… Rent or Buy?

There’s a saying– “Marry the house, date the rate”-- that is essentially saying you should prioritize buying the right home even if the interest rates aren’t ideal, because you can refinance when the interest rates decrease to your comfort level.

If you have the money for the down payment, your credit score is great to excellent, and paying the mortgage every month would account for less than 28% of your monthly take-home pay, I say buy the house. Mortgage rates are ridiculously high, but if and when they go down, you can refinance your house for a lower rate. If they keep climbing, you’ll be glad you got in at this rate, regardless of how insane it feels right now. 

In the end, the choice is yours. Life keeps moving forward, regardless of whether the stars align perfectly or not. If you're eager to take that step into homeownership, meet the criteria outlined earlier, and find yourself in a solid financial position, then maybe it’s time to marry the house.