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De-Mystifying Mortgages: Why Buying A House May Be Better Than Renting

Image courtesy of Diana Parkhouse via Flickr. Modified by Curiousmatic. 

Though mortgage rates have risen, rates are at an all-time low, with foreclosures easing as the 2008 house crisis ends.

Home ownership is one of those things many of us used to feel to be part of our birthright – an inevitable step up from renting, handed to us in an “American Dream” wrapper along with a car, a spouse, and a job.

As those who own homes and pay mortgages know, especially those who experienced the 2008 financial crisis and “housing bubble burst” as homeowners, buying a house is not at all a risk-free investment, nor is it easy. On the contrary, much goes into owning a house and paying off it’s mortgage, including the possibility of foreclosure.

With foreclosure filings plummeting in frequency in November 2013 (the lowest point in 8 years), the end of the housing crisis appears finally in sight. In fact, studies show buying can be cheaper than renting in longer-term scenarios.

How do mortgages work, and what are benefits over renting?

In contrast to renting, a mortgage is in essence a long-term loan, which buyers promise to pay to their lenders over time over a length of time, usually 15 to 30 years.

Mortgages also provide buyers with the possibility of accruing equity over time, as well as tax benefits, forced savings, and personal freedoms, mortgagecalculator.org lists.

According to the NY Times, buying is better than renting starting at five years, and increases rapidly the longer a home is owned.  If you stay in your home for six years, It will cost you $10,460 less than renting, which is an average savings of $1,743 for each year.

A study by Trulio’s Cheif Economist Jed Kolko reveals that in 2013, buying is 44% cheaper than renting just about everywhere, and will continue to be until mortgage rates reach 10.5% (currently, it’s at about 3.9).

What could go wrong?

Buying a house has its risks, of course. The best example of course would be the housing bubble burst that coincided with 2008’s financial crisis, when the value of homes dropped rapidly, causing a record of foreclosures nationwide.

While some are quick to say rising market prices indicate another bubble, housing prices are still down 27% from their peak seven years ago, according to the Columbia Journalism Review. Homeowners are spending historically low prices on mortgages (only 13%) – about the same as they were in 1999. Interest rates are historically low, as well, as the graph below demonstrates.

MortgageRatesgraphThis isn’t to say another bubble burst is impossible, just unlikely to happen soon. And that it wouldn’t be a bad idea to get a good loan while the price is great.

According to Bloomberg News (via the San Francisco Gate), foreclosure filings across the country in November 2013 were the lowest since December 2005, having decreased in 17 of the 20 largest cities. Though the price of houses may be rising, CNBC estimates that the it will moderate in 2014, while rents continue to go up.

All in all, if you can afford to make the investment necessary to take out a mortgage, 2014 might not be a bad year for it.

Which do you think is better, renting, or buying? Tweet us @curiousmatic.

Jennifer Markert