Buying a house is the next step for renters who have lived in rented apartments. While there is nothing wrong with living in rented apartments, owning a home may be a significant achievement for some. However, owning a home doesn’t relieve the individual of the expenses. They still have to bear some costs related to owning a house, the majority of which will be mortgage payments. Some people may view mortgage and rent payments as similar expenses and opt out of owning a home.
However, there are some differences when it comes to mortgage and rent. Before understanding the differences between rent and mortgage, it is necessary to understand what both of these mean.
What is Mortgage?
A mortgage is a loan that homeowners can get against their homes. Mortgages come with set payments that homeowners must pay against the loan, similar to any other loan. Usually, people looking to buy a house cannot afford to finance it fully. Therefore, they must take a loan to finance the purchase of a house.
However, when they take a loan against their home, they don’t completely own the home until they fully repay the mortgage. A mortgage also gives the lender the right to repossess the house in case the homeowner default on their payments.
What is Rent?
Rent is the term used to describe the payment against the use of a property. Generally, it refers to the amount a tenant or a lessee pays to the landlord for the use of the landlord’s property. Unlike mortgages, rent is not a loan but a payment against the use of an asset. Almost all properties used by someone other than the landlord will generate rent.
Differences between Mortgage and Rent
The differences between mortgage and rent are listed below.
Equity vs Expense
The main difference between mortgage and rent is the difference between equity and expense. A mortgage is a payment towards equity, while rent is an expense. That means every time a homeowner makes a payment toward the mortgage, it contributes to the equity of the home.
Mortgage payments may also include a portion of interest expense, which is an expense rather than equity. However, a majority portion of it will be equity or principal payment towards the mortgage. On the other hand, every time a tenant pays rent, it is only an expense that is irrecoverable.
With a mortgage, when the value of the underlying home appreciates, the homeowner directly benefits from it. Usually, the home value will appreciate over time under suitable conditions. However, mostly the amount of appreciation will depend on the market conditions of the home.
An appreciation in property value will also increase the equity in it. On the other hand, with rent, any appreciation of the value of the home will not benefit the renter. Instead, the landlord benefits from it. However, there is also a risk of depreciation, which will affect mortgage payers negatively, but not have any impact on renters.
Property maintenance is also a big part of any homeowner’s expenses. Depending on the home, some homes may require regular maintenance, which means homeowners will need to set aside a portion of their budget for it.
Maintenance expense paired with mortgage payments may take up a big proportion of a homeowner’s budget. On the other hand, in rental agreements, the tenant does not have to worry about maintenance as it is the responsibility of the landlord. However, the landlord may adjust the cost of the rent.
Another difference related to homes is insurance. When a homeowner buys a home, they must also get homeowner’s insurance. A homeowner’s insurance can be helpful in case of damage to the home and sometimes any other belongings inside it. With rent, the renter does not have to worry about insuring the property.
Home insurance, in that case, is the responsibility of the landlord. However, the renter may want to get insurance on their belongings inside the property. Similarly, while renters may not pay insurance for the property directly, their rent may already include an adjustment for insurance, same as with property maintenance.
Similar to insurance and maintenance, homeowners will need to pay for property taxes as well. These taxes differ according to every jurisdiction. Homeowners may get a tax advantage for paying mortgages, though, as interest payments on mortgages are tax-deductible up to a specific limit.
For renters, the property taxes may not be a problem as they fall under the responsibility of the landlord. However, as with all other expenses not borne by the renter, the landlord may adjust this in the rent.
Owning a house can be a significant achievement instead of paying rent on someone else’s property. However, owning a house may come with mortgage payments as compared to rent. There are many differences between mortgages and rents. The first difference is that mortgages are equity payments, while rents are expenses.
Homeowners can also benefit from property value appreciation, while renters can’t. Homeowners must also pay property maintenance, insurances, and taxes, while for renters, their landlords may have already adjusted these in the rent.