Mortgages in Plain Terms
Money
Explains the parts of a mortgage payment, how amortisation actually behaves, the difference between fixed and adjustable structures, and what underwriting is examining. General explanation only.
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Renting Against Owning
Renting and owning are two ways of paying for the same thing: occupation of a dwelling. They differ in who carries which risks, and in how much it costs to change your mind.
Sections on this page
TThe costs that are easy to see
Rent is a single visible payment. Ownership replaces it with several: mortgage interest, property taxes, insurance, maintenance, and where applicable association dues. Principal repayment is a fifth item, but it is not a cost in the same sense; it is a transfer from one pocket to another.
Comparing rent against a mortgage payment alone therefore compares unlike things, and it flatters ownership. The honest comparison is rent against the sum of interest, taxes, insurance and maintenance, with principal excluded.
TTransaction cost and the holding period
The decisive variable is usually how long the household will stay. Buying and selling a house both carry substantial one-off costs, and those costs are incurred at both ends of the ownership period. Spread over many years they are small; spread over two they can exceed everything else in the comparison.
This is why ownership tends to be the cheaper arrangement over a long horizon and the more expensive one over a short horizon, more or less independently of what prices do. Any comparison that omits the cost of the eventual exit is incomplete.
WWho fixes the furnace
The most underweighted difference is liability for the building. A tenant whose heating fails makes a telephone call. An owner whose heating fails makes a payment, and the timing is not negotiable in January.
Maintenance on an older house is not an occasional event but a rolling programme: roof, mechanicals, windows, exterior paint, drainage. Budgeting for it as an annual provision rather than as a series of shocks is the difference between ownership being manageable and being precarious.
FFlexibility as a real asset
The ability to leave at the end of a lease has genuine value: it allows a household to take a job elsewhere, to leave a neighbourhood that no longer suits, or to reduce its housing costs quickly. Ownership converts that flexibility into an asset that takes months to liquidate and costs money to sell.
Whether that trade is worth making is not a financial question with a single answer. It depends on how settled the household is, and a rational answer for one is irrational for another.
PPrice appreciation, treated carefully
Owners are often told that owning builds wealth. Some of that is real and prosaic: an amortising loan forces saving, and the forced saving is the main mechanism by which most owning households accumulate equity.
The rest depends on prices rising, and prices do not always rise. Over a long horizon housing has historically tracked incomes and construction costs more closely than it has outrun them, and the periods when it clearly outran them were usually the periods described on the page about credit. Treating expected appreciation as part of the arithmetic is a forecast, not a calculation, and this site does not supply forecasts.