How is a mortgage different from rent? While both refer to payments made to live somewhere, mortgages and rent are very different concepts.
Once you understand the definitions, you’ll see why.
A mortgage is a type of loan that is used to purchase real property such as your house or condominium, whereas rent is a payment made to the property owner for a right to occupy the place.
For example, Billy would take out a mortgage to buy a house, but his brother Fred would pay rent to the property owner for the right to live at his apartment.
Mortgage vs Rent: What Do They Mean?
A mortgage is a type of loan to help purchase a real estate property. The goal of the mortgage is to give you enough money to purchase a home.
The mortgage (loan), together with your down payment (your equity) sums total the purchase price of the home you are purchasing (excluding transfer taxes, insurance, property tax, brokers commission and some other potential charges).
What’s the catch? Well, you need to pay back the mortgage plus interest (or additional monies) and possibly some of the above-mentioned one-time fees (if part of the mortgage/ loan). This is how the mortgage company or bank makes money.
On the other hand, rent are fees paid in exchange for the right to live somewhere (could be an apartment, home, or condo) for a specific period of time.
Both require contracts.
How are Rent and a Mortgage Different?
When you take out a mortgage for a property, and complete the purchase of a property, you become the owner (subject to conditions of mortgage documents and other contracts) and the obligation to pay back the loan over a fixed period of time (which could be 15, 20 or 30 years).
Once you purchase the property, you are generally free to make any changes inside (subject to any contract, homeowner association stipulations, municipal or township codes) but will need to keep in mind the need to obtain approvals before major changes or renovations can be done.
Renting is a shorter-term financial commitment, usually about a year on average. You do not own the property, so there may be some limitations about what you can and cannot do inside.
Both payments are typically made monthly.
Should You Rent or Buy?
The decision on whether to rent or buy is beyond the scope of this article and depends on a myriad of factors, including your monthly income, how much cash you have on hand, how long you plan to live, the lifestyle you are looking for, and more.
Ultimately, the decision is based on your own personal circumstance. Understanding the difference between the two can help you decide which is best for you.