How Rent Differs From a Mortgage

Almost every homeowner started their Real Estate journey by renting their primary residence and gradually saving up to buy their own home. Once you purchase a home it can be easy to assume that you are just swapping out your monthly rent payment for a mortgage payment. But under the surface there is a lot more going into that mortgage payment then you may think. Owning a home rather than renting is going to result in additional expenses and responsibilities, so today we are going to break down the main differences between the two payments to better help you understand where the money is going.

A Mortgage gradually reduces what you owe:

Unless you had the funds to purchase your first home with cash, you most likely had to go through a lender and get a 15, 20 or even 30-year mortgage. Every month the money you pay to the lender goes towards buying back ownership of the home, with the idea being at the end of the loan term you will own the property free and clear. There are four main fees included in the mortgage payment:

Principal stands for money that goes specifically towards paying down the balance of the loan. You have the option to pay the minimum amount required or more depending on your situation.
Interest is the cost of the loan you are using to finance your home. The interest rate is discussed with your lender when you apply for a home loan.
Property taxes are the amount of money you owe to the government for holding property.
Homeowners insurance is there to cover your costs if you should be the victim of weather damage, theft, or other unforeseen issues.

Rent on the other hand, is simply a payment to the landlord which allows you to keep living in a property they own. Your rental payment doesn’t buy you any stake in the home, but it also absolves you of responsibility for the maintenance of the home or any major issues that occur. To some renters this trade is worth the amount of money they pay in rent every month.

There are payment fluctuations with both a Mortgage and Rent:

When a mortgage payment fluctuates it usually has to do with the interest rate, the homeowners insurance or the property taxes being higher or lower than they were the previous year. Payment fluctuation isn’t always a bad thing and can sometimes lead to you having a smaller mortgage payment every month. You also have the option of using a fixed-rate mortgage which keeps the interest rate stable on the loan for a specified period of time.

Rent payments generally increase and continue to do so year over year. Unless you have a landlord who will not increase the rent payment, expect them to charge you 1 – 3% more for rent every year to stay consistent with inflation.

You can take advantage of tax benefits with a Mortgage:

As we mentioned above, part of your monthly mortgage payment goes towards the interest owed on the loan. As of right now, interest rates are at an all time low, meaning the amount of money you pay every month goes more towards lowering the balance on the loan than it does towards the interest. The main tax benefit associated with having a mortgage is that you can write off the interest payments on the mortgage. So, during tax season you will either be able to reduce your taxable income and pay less in taxes, or receive a bigger refund.

As you may have guessed, unless you are paying interest on a mortgage you can't take advantage of this tax benefit. So as a renter, unfortunately there is nothing to take advantage of during tax season.

If you would like more information or detailed insight into the Maui Real Estate market, contact the Smith Team today. We have decades of combined experience and are excited to help you get into the perfect Maui property!

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