Stable Monthly Housing Costs
Remember those guessing games you used to play back in your days as a renter? “How much will rent jump to this year?” “How much do I owe in utilities this month?” Those games come to an end once you’re a homeowner. Yes, there are fluctuations in how much you pay, but those fluctuations are fewer and further between for a homeowner than they are for a renter. Those of you out there who think of home ownership as a terrifying, costly wallet-vacuuming venture should think again. Home ownership can, in some cases, be cheaper than renting. In pretty much all cases, it’s much easier to budget once you own a home than when you’re renting.
The reason? Stable monthly housing costs. In contrast to a renter, a home owner can budget for the following each month:
Mortgage payments Utilities Property taxes Maintenance fees (if applicable) Rent Payments vs. Mortgage Payments
Bill and Justine had been friends since their freshman year of college. Their lives followed very similar paths for years. They graduated from college on the same day, backpacked around Europe for the same few months following graduation and, upon returning, landed entry-level positions at major communications companies within days of each other.
After a little over a year of work, Justine called Bill to announce that she’d just put a down payment on a condo.
Bill scoffed at the news. He told her that it would take her years, if not decades, to pay off her mortgage. She should be more like him, and simply rent. It was cheaper, Bill insisted, and less responsibility. After all, he paid only $650 a month for his apartment, while Justine’s mortgage payments would be closer to $950. Miffed at the lack of support, Justine told Bill to do things his way, and she’d do things hers.
Ten years later, Bill was still renting his apartment and Justine was still making mortgage payments on her condo. The only difference was, now Bill was paying $935 a month in rent… and Justine was still paying $950.
Renters will tell you it’s “cheaper” to rent, and yet more and more people are opting to buy homes and pay off mortgages instead. Why? Because of situations like Bill and Justine’s. Originally, Bill was paying much less in rent than Justine was in mortgage payments. However, as the years passed, the rent in Bill’s apartment complex increased steadily, while Justine’s mortgage payments remained fixed. This is not a one-of-a-kind situation by any means. Rent has a tendency to increase once a year, if not more. Justifications for rent increases can include anything from increased property taxes, to repairing fire or flood damage, to citywide rental unit shortages and a fierce demand for rental accommodation. The point is, if you’re renting, do not assume that what you’re paying now is what you’ll pay five years from now.
On the other hand, with a mortgage, you might end up paying the same amount every month for years, depending on the type of mortgage you get.
Types of Mortgages
There are two types of mortgages: fixed-rate mortgages and adjustable-rate mortgages. With a fixed-rate mortgage, the borrower pays back the same amount every month. With adjustable-rate mortgages, the borrower pays back a different amount depending on what current interest rates are like.
Interest rates are largely dependent on current trends in the lending industry. When the demand for loans and mortgages is high, interest rates will increase. Similarly, if the demand is low, the interest rates will be low, as well. The lending industry is affected, in turn, by factors like the Consumer Price Index, the Gross Domestic Product and the Employment Cost index. These factors all indicate whether the economy is booming or slumping. Basically, if the economy is up, lenders charge more interest. A strong economy means that people have money, and are willing to spend it on goods and services. When the demand for goods and services exceeds the availability of goods and services, lenders respond by charging higher interest rates—which means you’ll pay higher mortgage rates.
Lenders tend to offer the best (read: lowest) mortgage rates at times when the economy is slower. Investors offer these rates on the assumption that the Federal Reserve (or Bank of Canada, if you’re north of the border) will cut interest rates to help boost the economy.
If you purchase a fixed-rate mortgage, you can rest assured that the mortgage rate will remain at the same rate throughout the duration of the mortgage. Fixed-rate mortgage holders always pay the same monthly amount, no matter what’s going on in the economy. This type of plan is attractive in some ways: you know exactly what you’ll owe, and when. However, fixed-rate mortgages have drawbacks. For example, if you go for this type of mortgage, you have to commit to paying it off over a certain period of time. If you pay it off earlier than the agreed-upon date, you’ll pay a penalty. This penalty is basically the bank’s way of assuring that they’ll make money off your mortgage no matter what.
Nevertheless, many homebuyers find fixed rate mortgages attractive, especially as an alternative to paying rent. Because fixed-rate mortgages stay the same, as rent prices increase, you’ll find yourself paying the same amount for years, even decades… as long as it takes for you to pay off your mortgage. True, you may at first be paying more than your renter friends, but as their payments rise, yours will stay the same. Plus, you’ll have the security of knowing that you are the owner of your own home.
On the other end of the mortgage spectrum lies the adjustable-rate mortgage. This type of mortgage is more of a “gamble”. Some months, you could be paying less than a fixed-rate mortgage holder; other months, you could be paying more. In other words, you may end up paying more or less than a fixed-rate mortgage holder in the long run, even if the value of your homes is the same. With an adjustable-rate mortgage, the amount that you pay from month to month fluctuates according to current mortgage rate trends. Though these types of mortgages offer less security than fixed-rate security mortgages, they also tend to demand lower interest rates.
You might decide that an adjustable rate mortgage is the way to go. If so, then keep in mind that even with this type of mortgage, your monthly payments will remain within a certain range for the entire life of the mortgage. Yes, the interest rates will fluctuate, but they do so much less nowadays than in the past. And certainly, they will fluctuate less than rent rates.
