Transcription
You've been told buying builds wealth, renting is throwing away money. But what if I told you that belief could cost you hundreds of thousands of dollars? In fact, in 2025, renting might be the smartest financial move you can make. And I'll prove it to you. Renting is not financial suicide. Renting is not wasted money. It might save your financial life.
Hi, I'm Mike Patel. Thanks for watching my channel. This video calls for a mind shift. If you've been told and hammer and heard all these times that renting is throwing away money and that you should buy a house as soon as you can, even if you can't afford it. So let's look at what we're going to talk about.
This video is so important these days, which it did not apply maybe 10, 15 years ago. Yes, it's true that buying a house will create more wealth. If you own a house, you will have 42 times more net worth than if you're renting. But these days in 2025, 2026, when affordability is unreachable, home prices are sky-high, rates are high, and everything else is expensive, renting may be a better option. So, if you're thinking about buying or if you're feeling guilty that you don't own a house, let us look at these numbers and analyze this situation. Let's see what's best for you. Buying a house now or getting ready to buy a house in 2 or 3 years.
Renting isn't a failure. It's a financial strategy. By renting, you have the freedom to move whenever you want to, keeping a big elephant on your shoulder, which is the house. Because the house will guzzle your money every month like clockwork. If you are renting, you don't have to worry about fixing things, about paying you the property taxes, about paying the high insurance rates, about keeping up the houses, about any HOA regulations should there be any. So, you have a lot of freedom by being a renter.
Bankrate study shows that renting is increasingly more affordable than buying in most large US metros. This is an article from April 2025. When you rent, you have no unknown costs. You know that your rent is $2,000 a month, $3,000 a month, and that's it. You won't have any other costs as far as your housing costs go. But when you own a house, you have a lot of hidden costs. As an owner, you don't know what's going to happen with your payments. Yes, your principal and interest are fixed mortgage. Let's say they are $2,000 or $3,000 a month or $4,000 a month. But then you have property taxes, you have insurance, you might have association fees, you have repair costs, and that can skyrocket. In fact, in the last two years, those factors have skyrocketed and a lot of homeowners who bought two years ago, three years ago, five years ago are at the brink of losing their homes because they did not anticipate all these increases where the insurance skyrocketed, doubled, tripled, property taxes skyrocketed, doubled, tripled. So, the mortgage payments have doubled and tripled. Yes, they have doubled and tripled and they're at the brink of losing their homes. There are at least 2 million homes which were sold via government loans, FHA, that are in trouble right now.
Let's look at the reality check. If you're thinking about buying a house right now, the predictions are home prices are not going to drop. The interest rate, as you can see from this chart, right now it's around 6.8% to 7%, the 30-year fixed mortgage average has been around 7%. They've been as high as 12% to 13%. Yes, they've been as low as 2% to 3% in 2021. But if you look at the average, they're at 7%. So if you feel that you cannot afford or it's too expensive or it's hard to qualify to buy a house at 7%, guess what? Those are normal rates. If you look at the history of mortgage rates and guess what? Prices are not dropping anytime soon.
There are three myths or three lies about renting that have been going around for years and years and years. Let's look at those. The first myth is that rent pays someone else's mortgage. I've used that word myself. Hey, if you're renting, you're paying your landlord's mortgage. But that is not necessarily true. Just because a landlord has a rental income of $2,000, $3,000, $4,000 a month, doesn't mean that he or she is laughing to the bank. We don't know that the landlord has other expenses. Maybe has a $2,000 mortgage. But what if their property tax has increased? What if their insurance cost has increased? What if their repair cost has increased? What when they try to rent something, the house is vacant for two or three months. That's a loss of income. So technically speaking, renters are not paying their mortgages. Renters are getting service by being freedom from all the expenses, the repairs, and being carefree. You work 9 to 5 and then you take off on the weekend. You don't have to fix anything or take care of the house. That's the freedom that you pay for renting, and you're absolutely not paying the landlord's mortgage.
Myth number two, I mentioned that renters throw away money. Absolutely not. As I mentioned earlier, rental is your financial freedom. Rental is your freedom to move after a year or move after 2 years. When you have a house, you're stuck in there for 5, 10, 15, 20 years. So, there's definitely financial freedom of renting.
I want to run through a scenario where you buy a $400,000 house, which is close to the median sales price in USA Today, and assuming you put 20% down with a 7% fixed interest rate, your mortgage payment will come out to $2,054 a month. That is just your principal and interest. If you're in Orange County, where the property tax will run you about $400 a month, your home insurance will run you about $125 a month. Then you have other costs. Let's say repair costs, upgrade costs, etc. That's going to run approximately $3,300 a month. It's going to cost you $2,900 a month just to own the house and maintain it, not counting any other costs. But here's the kicker that I want to look at. If you look at this chart, when you buy a house for $400,000, the chart shows that your interest that you're going to pay on this house with a loan amount of $320,000, the total mortgage payments is going to be $739,000 of interest. So, by the time you buy the house for $400,000, you pay the mortgage, the house is going to cost you $1,048,000. If you're renting, and on that house, and I'll show you later on what a $400,000 house rent is. It's around $2,500. If you are renting, you're only paying $2,500 a month, $2,500 a month, maybe 2% to 3% CPI increase, consumer price index or inflation increase. You're never going to pay a million dollars in 30 years by just renting.
So, as you can see, buying a house is not cheap. It's very, very, very expensive. Furthermore, once you buy it, you're stuck with it. You can't just get out. What if the market drops and you cannot sell the house? What if one of you, if you're married, one of you loses a job and you are making a $3,000 a month payment and now all of a sudden you can't make that payment. You are going to struggle to own that house and to keep that house.
The myth number three is that you're building equity every year. Yes, as a homeowner, you are building equity, but it's not as simple as that. You're building equity and you are building sweat equity, which means that you are paying every month that $3,000 we talked about like clockwork. That's principal and interest, but that does not include the tax and insurance going up, repair costs going up, all the time that you spend fixing up your roof or your air conditioning or calling somebody. So, equity is not built in. It costs you a lot of time and money and payments. Furthermore, as a homeowner, just because you make a $3,000 a month payment doesn't mean you're building equity. If you look at this amortization chart, in the first 20 years, you're paying an average of $12,000 in principal, but you're also paying almost $12,000 a year in interest. So up to 20 years, you're pretty much paying a lot of your payments into interest and not principal. This is how principal and interest work. In the first year, pretty much 80% to 90% of your check goes towards interest and only 10% to 20% goes towards your principal. But until 20 years, they're pretty much even. Half goes to principal, half goes to interest, which means you're waiting for 20 years to even start building any sweat equity or financial equity. Of course, there is equity where your home prices go up. But remember, home prices go up and down. So, that kind of evens out.
So, depending on what city you're in and what state you are in, you may want to run some numbers. And there are a lot of calculators out there. You can Google it and you'll find buy versus rent calculators. But I'm going to give you a scenario where you can see what the rental rates are and what the cost of owning a house will be. So let's look at a typical home of $400,000. I took this average home. It's in Texas in Plano, Texas. It's a $400,000 house. And if you look at it, the estimated payments with 20% down, 7% fixed interest rate 30-year, your payment will be $2,639, which is the principal and interest only. By the time you add your principal and tax and insurance, etc., you will pretty much go over $3,000 a month. But the same house, if you were to rent it, then it so shows here, and this is according to the Zillow rent estimate, you're going to pay about $2,400 per month. So, as you can see, if you buy a house, your payment is going to be around $3,000 a month. That's assuming everything stays the same. That does not cost any money about repairs and upgrades and anything else that'll come up. And believe me, something will come up. I own rental properties and I own my house for the last 30 years and every month I'm spending some money fixing something on average. So, as you can see, renting in this scenario is much cheaper.
But here's the kicker. When you're renting, you only put a security deposit, usually first month's rent or first and last month's rent. But when you buy a house, you have to put 10%, 20%, 30% down to qualify. So, let's look at the other advantage of renting. And of course, I'm not trying to tell you whether you should rent or don't buy. And I'm not saying you should buy or you should rent. I'm just giving you the numbers and the scenarios based on the current market. The notion that renting was always better than buying. That notion is becoming false. It may be better to rent than to buy. But of course, your situation right now, you may be financially struggling or there may be other struggles. It may change. But at this point, if these numbers make sense to you, I just want to give you information and then you decide what's best for you and your family or at what time it is.
In the meantime, if you have any questions or need any information deciding whether you should buy or rent and if you want to talk to a local realtor or a local lender, I belong to the group of top 3% of agents as far as production and experience and negotiating skills. I have a referral network. So, if you want, I'll be glad to refer you. Link is in the bottom. Fill it out and I'll be glad to refer you.
So, here's the exciting part about renting versus owning. And I like this scenario. Although I'm not doing it, I like it. Some of my friends are doing it. Is that pretend or let's say that you did not buy a house. And in this case, you were going to buy a $400,000 house and you were going to put 20% down. Of course, I'm using 20% as an example, but it could be 10% down or 5% down or 30% down. But let's use this scenario where somebody bought a house for 20% down which was $80,000 and put down payment. You decided not to buy and you decided to rent instead. And if you had the $80,000, you put it in a mutual fund or in stock investment or some kind of investment where you were getting 7% rate of return. So let's look at what happens if you bought a house and you put $80,000 into a house. You were paying for up to 20 years as a lot of interest. Let's compare that to what happens if you took that $80,000, put it in an investment account for 20 years, how much money you will make. This calculator shows that if you put $80,000 for 20 years at 7% compounded rate, in 20 years, you will earn $244,000 plus the $80,000 that you invested. So, in 20 years, you will have $325,000. Here you go. You just built equity without spending any money and without fixing anything and having your weekends free.
But let's take it one step further. What if you were even more astute or more financially smart and you took that one step further and what you did was you invested that $80,000 initially and you got a 7% return and you were kept it in there for 20 years. But let's say that the $500, $600 that you would have have spent on fixing up the property and paying the property tax and insurance, instead you only took $300 of that money and every month you put it in the same account where you put your $80,000. Then, as you can see, you would have saved an additional $329,000. You would have earned $329,000. So, after you had $80,000 initially invested, then you put in like clockwork $300 a month, every month, you would have in your bank account or in your portfolio account $481,000. Now, that's what I'm talking about.
Now, one of the things I want to talk about is the 28% rule. So, if you are thinking about buying a house, you cannot just go to the bank and say, "Hey, bank, I want money. I want a loan." They're not just going to give you a loan just like that. You have to qualify for it. You have to prove your income. You have to have a good credit history, a good FICA score. So, I want to take you through the steps of the 28% rule. What is that rule? The banks want to see that your PITI, the principal, interest, tax, and insurance, which every home is going to have. That's not even counting HOA fees, which is the homeowners association. They will look at your ratio. So, if you make $10,000 and your payment, they don't want your payments to exceed 28%. That means your house payment should not exceed $2,800 in this case per month. So if you're going to buy a $400,000 house in the example I've been using in this video, if you buy a $400,000 house and if you put 20% down, your principal and interest is going to be approximately $2,129, your property tax, if you're in Orange County at a property tax rate of 1.25%, is going to be $417 a month. Your homeowners insurance, that is an estimate, is $100 a month. Your HOA fees is zero in this case, but then we add the maintenance reserve of $333. Then your total PITI estimate is $2,900 a month. So the banks are going to look at how much do you need to make monthly to qualify to be in that 28% bracket, which is called the debt to income ratio. So to qualify, the banks are going to look at your tax records or income papers and see that you're making at least $10,600 per month. Of course, these are approximate numbers. So in other words, for you to make a payment of about $2,500 to $2,800 per month, they need to see you making about $10,600 a month. That is what we call the front-end ratio, 28% rule.
But there's also a back-end ratio which is usually 36% but it could go up to 42% to 44%. It's called the back-end ratio or DTI debt to income ratio. I won't get into the details but what the banks look at in addition to your PITI is do you have car payments? Do you have any credit card bills? Now they're looking at medical bills, any student loans, any liens on the child support. So they're going to add all those and if that's more than 28% you will not get a loan and that has to be 36%. So I don't want to confuse you and I don't want to get too much into details but there's two ratios they look at. One is the 28% which is the PITI and then they look at the 36%. So when they calculate the 36% debt ratio, they look at your PI, TI plus your car payments, plus your credit card payments, plus your any liens or any support, student loans, etc., etc. But these will give you an idea how the banks qualify you. It'll also give you an idea, hey, how much house can I afford? If I make $10,000, then how much payments can I afford with my cars and credit cards and medical and the PITI? So just for a reference point, it'll give you an idea.
So to make a decision whether to buy or rent you have to be comfortable first of all of how much payments you can afford which is the PITI plus all the other payments your car payments etc kids school everything then you also have to be comfortable in being stuck in that house for 7 to 10 years because in this market for your investment that you make into buying a house it may not be worth it if you sell in 10 years because remember the first 10, 15, 20 years you are paying a lot of interest, a lot of interest. So all those payments that you make may not be worth it.
So in other words, when does it make sense to buy a house? Well, first of all, you need to stay there for at least 10 to 15 years in today's market. You've saved up 10% to 20% at least to purchase the home. If you don't have that money, we don't recommend that you pay 5% down or 10% down. We recommend 20% down because that means that you are a sound buyer. I know there's a lot of people buying at 3% 3 and a half% down. They are struggling to buy the house. That means they are struggling to pay the house and they'll never catch up. In fact, I gave you a scenario earlier that in 2025 there are up to 2 million homes in delinquency are behind. These are the same people who bought loans at 3% to 3 and a half% down. They were struggling to begin with and now they're really struggling. So, if you're not comfortable saving enough money, if you're not comfortable enough to make those payments, it's not a good idea.
So, the more down payment you put, you want, if you put 20% down, you save on your private mortgage insurance, which could be anywhere from $100 to $200 a month. Plus, by putting 20% down or more down, you're reducing your interest payments every month. And if you are still thinking about renting and thinking about buying later on, renting isn't less than. It's smart in many cases. Focus on liquidity, investing, and flexibility. Real wealth equals control, not a mortgage you can't afford or you will struggle to pay for the next 30 years. By renting, you're not throwing money away. You're avoiding a trap that's taken down even seasoned buyers. Run the numbers. Think for yourself and build wealth your way.