Housing data from Redfin suggests that the average mortgage payment is cheaper than the average rent, even for homeowners that put zero down.
For prospective homebuyers nervous about monthly mortgage payments, a look at recent housing data may tip the scales.
According to Redfin, the national average monthly rent payment in May 2021 was 70 dollars higher than the average monthly mortgage payment on a single family home loan with a 0% down payment.
And the gap widens as the down payment increases. With a 5% down payment, the national average monthly mortgage was $1,580 -- $156 less than the average monthly rent payment. The difference is over $500 per month for homeowners that make a “traditional” 20% down payment.
Home prices have surged in 2021, but not enough to keep up with rent increases. From March to May, the national average monthly rent increased from $1,616 to $1,736. Meanwhile, the average mortgage payment levelled off from April to May.
With the average mortgage payment lower than rent, homeownership seems like the obvious choice to both save money and build wealth through home equity. But common sense isn’t the biggest barrier to homeownership -- down payment is.
According to Redfin, the national median sales price hit a record-high $406,000 in June 2021. A “traditional” 20% down payment for a home at this price is $81,200 -- a hefty sum that could take years or decades to save up.
However, making a 20% down payment is hardly the status quo anymore. HousingWire found that the average down payment was just 5.3% of purchase price in 2019.
A 5% down payment on a $406,000 home is $20,300, which is still a sizable figure.
But on average, homeowners that put 5% down spend $156 less per month than renters. Over the life of a 30-year mortgage that adds up to $56,160 that owners save over renters. And that’s without factoring in three decades of rent increases.
That’s also not to mention down payment assistance from family or government programs, which can in some cases cover the entire down payment.
While it seems expensive to buy a home, saving up for the down payment appears well worth it in terms of out-of-pocket savings and wealth creation through home equity.
Using national averages and medians is tricky because the U.S. housing market is so large and diverse. Renting is more expensive than owning on a national level, but it’s not necessarily true in every metro area.
This trend falls apart as home prices increase. More specifically, when the median sales price for a metro area hits the $700,000 mark, monthly rent payments tend to become cheaper than mortgage payments.
The difference between renting and buying in Boston, MA versus Seattle, WA is an excellent example of this tipping point.
And then there’s fast-growing metros like Denver, CO and Austin, TX that blur the line. For example, Denver has a median sales price of $589,000 yet the average monthly rent is $37 cheaper than mortgage payments with 5% down.
Anomalies aside, the data paints a clear picture that in most of the country it’s cheaper to own than rent -- even with a minimal down payment. And not only is homeownership cheaper, it’s a path to wealth creation through home equity.