Choosing whether to commit to a mortgage or continue renting an apartment is a highly personal decision. There are pros and cons to both approaches. What’s right for you will depend on your financial situation and personal needs. In this article, we’ll discuss the difference between mortgage and rent and what to consider when deciding between the two.

What is the Difference Between a Mortgage and Renting?

The biggest difference between rent and mortgage is who owns the property: you or someone else. A mortgage is a loan provided by a bank to help you purchase your own home. They give you the money to buy the house, and you pay them back over time with interest. This cost of a mortgage is broken down into monthly payments that typically last anywhere from 15-30 years. 

Rent is paid on a monthly basis as well. But instead of paying a mortgage lender, the money goest to the owner of the home you’re living in. Rental agreements are much shorter than mortgages, usually lasting 12 months with the option to renew when the lease is up. 

Is a Mortgage Cheaper Than Rent? 

Monthly mortgage payments are often slightly cheaper than monthly rental payments for a similarly sized property. However, it’s important to note that owning a home comes with additional costs and commitments that rental properties do not.

Initial Costs and Monthly Payments

Taking out a mortgage and renting both come with upfront costs. Initial costs for a mortgage include: 

  • Down payment: A down payment is an upfront payment made to secure a mortgage. Down payments range anywhere from 3% to 25% of the total cost of the property and they go towards the cost of the loan. For example, a 20% downpayment on a $500,000 home would be $100,000. 
  • Closing costs: Closing costs are expenses the buyer pays when purchasing a home. These include appraisal, escrow, title and closing fees.

Initial costs for a rental include: 

  • Security deposit: Most landlords will ask for a security deposit when moving into a new apartment. This is often equivalent to one month’s rent and may be partially or fully returned to you when you move out. 
  • Application fees: This is a small non-refundable fee charged when you apply for a new apartment. These fees usually range from $25 to $70 per person, depending on the landlord or management company. 

Ongoing Costs

Aside from utilities and potential monthly fees for things like pets, parking or trash removal, renters usually won’t have many notable ongoing costs. Some property management companies and landlords may require renter’s insurance, which can be paid monthly or annually. 

Homeowners, on the other hand, have several ongoing costs: 

  • Property taxes: Homeowners are required to pay property taxes, which can be substantial depending on the location and value of the home.
  • Homeowner’s Insurance: While renters may have renter’s insurance, homeowner’s insurance is required, and it’s generally more expensive.
  • Maintenance and repairs: Homeowners are responsible for all maintenance and repair payments, which can range from minor fixes to major projects like roof replacement.
  • Homeowners association (HOA) fees: If the property is in a community with a homeowners association, monthly or annual fees are usually mandatory.
  • Utilities: Homeowners have to set up and pay for each of their utilities.
  • Lawn and yard maintenance: Owning a home with a yard requires regular lawn care, including potential costs for landscaping, lawn mowing services and equipment.
  • Pest control: All pest control  costs are the responsibility of the homeowner, whether ongoing or one-time services.
  • Renovations and upgrades: Over time, homeowners may need or want to make improvements to their property, which can be costly.
  • Appliance upkeep and replacement: Homeowners are responsible for repairing or replacing appliances, whereas renters would typically rely on the landlord for this.
  • Mortgage interest: While not a separate cost, the interest on a mortgage is a significant ongoing expense that renters do not have.
  • Emergency funds: Homeowners need to have a financial cushion for unexpected issues like plumbing emergencies, electrical problems or natural disasters.
  • Cost of selling the home: If a homeowner decides to move, they’ll incur costs like real estate agent commissions and closing costs, unlike a renter who can simply end their lease.

Long-Term Financial Growth

When looking at the difference between mortgage and rent, it’s important to consider long-term financial growth as well. While buying a house requires a significant financial commitment upfront, it will also generate equity over time — particularly if the home appreciates in value. Renting doesn’t give you the same opportunity to build long-term equity. 

What About “Rent-to-Own” Options?

Rent-to-own agreements serve as a middle ground between a standard lease and a mortgage. Here’s what to consider when evaluating rent-to-own vs. mortgage agreements. 

How Does Rent-to-Own Work? 

In a rent-to-own agreement, you’ll sign a lease, just like you would with a standard rental. However, this lease also comes with the option to purchase the property after renting for a specific period of time. The amount you pay in rent during that time serves as your down payment. 

The monthly payments in a rent-to-own agreement are usually higher than standard rentals.  Buyers may also need to pay a non-refundable option fee as well, which is also put toward the total cost of the house. 

Financial and Flexibility Implications of Rent-to-Own

Rent-to-own agreements make buying a home more financially accessible, as they allow you to save for a down payment and pay rent at the same time. When comparing rent-to-own vs. mortgages, rent-to-own agreements are more flexible, as you aren’t required to purchase the home at the end of the agreement. 

However, rent-to-own agreements are much more of a commitment than a traditional rental. It’s important to note that they are also more expensive and you may lose a significant amount of money if you don’t make a purchase at the end of the rental period. 

How to Choose Between Buying and Renting a Home

Deciding between homeownership and renting is a decision that shouldn’t be made lightly. Ask yourself these questions to ensure you make an informed choice:

  • Am I financially prepared for a long-term commitment?
  • Am I sure I want to live in this location for the foreseeable future?
  • How much financial risk am I willing to take?
  • What other financial goals do I have for the next 5-10 years?

Find Your Next Rental With Southern Management

If you’re looking to rent an apartment in the Baltimore or Washington, D.C., metro areas, Southern Management is here to help. With a wide selection of apartments, we offer something for everyone. Get in touch today to learn more or schedule a tour. We can’t wait to welcome you home!