Saving money for the full price of a home while renting vs getting a mortage and buy home now, which is better?

Most people who buy a home takes the loan. Does this mean taking a loan is always the best option?

No, but it gets you into a home now and most people are impatient.

The fastest way to get into a debt-free home is to rent as cheaply as possible, save money as fast as possible and buy a home for cash. You can even "snowball" this by buying a very cheap home and saving what you would have paid on a mortgage until you can buy a bigger home for cash.

The same principle works for cars, too, although you can buy a decent car for much cheaper than even the smallest home. Buy a cheap car, save up like mad for a few years, and buy a nicer car for cash.

It is better to buy your home now if your interest (only interest and not paying down the principal) you are paying is lower then your rent.

The reasoning behind it is that with the rent you are paying now you can probably pay interest plus some of the principal, which shortens the time to get your home debt-free. Otherwise you have to pay rent to somebody else and save for the whole amount ultimately taking longer to reach the full amount of the home.

I doubt there is a one size fits all answer to your question but I would like to offer some counter arguments to the idea of not taking a mortgage.

• Interest rates are currently at historic lows and will most likely continue to be for the next few years, making the cost of borrowing relatively inexpensive.
• While house prices can and do decrease sometimes, I would wager that house price increases will be much greater than interest rates. Current economic conditions due to the pandemic may alter the "normal" real estate markets behavior, however.

As for the tipping point, the New York Times has an interesting rent-or-buy calculator. The accuracy of that calculator of course depends on a lot of assumptions, so getting your inputs right is of great importance, especially if you are close to the tipping point.

The main reason to borrow money to buy a home is this: If you try to save while renting, you still have to pay the rent every month. If you borrow money to buy the house, then you're not paying rent, but all the money is going toward the house.

I have no idea what price range you're in but just suppose for the sake of discussion you have $1,000 a month available for housing. You could rent for $800 per month and save the remaining $200 toward buying a house. Or you could get a mortgage for $1,000 per month and put all $1,000 toward this house. If you save while renting, all the money that you put toward rent is money that COULD have gone toward buying a house.

The main reason NOT to borrow money is to avoid paying the interest. When you get a mortgage, you typically pay a LOT of interest over the life of the loan. Depending on the length of the loan and interest rates, it routinely ends up that 50% to 75% of what you pay goes toward interest.

Which decision is better for you depends on many factors. I couldn't begin to give you advice without a lot more information.

Other things to consider:

When you buy a house, you are responsible for maintenance. If the roof needs to be replaced or the furnace breaks down, you have to pay to fix it. When you are renting, the landlord is responsible for maintenance and your rent covers all these expenses. People often say, "Oh look, I'm paying $1,000 a month for rent and I could buy an equivalent house with a mortgage of only $800 per month. Buying is a much better deal." Not necessarily, because the $1,000 rent includes maintenance but the $800 does not.

How likely are you to want to move in the next few years? If you rent and you decide to move, you just move out and stop paying rent. Worst case, you may have to pay for a few months remaining on a lease. If you own a house and you decide to move, you have to sell the house. Depending on market conditions at the time, that may be easy or it may be hard. It may be impossible to get back what you paid for it, or even to get what you still owe on the mortgage. You'll have to pay a realtor to help you sell the house, which in the US is typically 6 or 7% of the sale price. In the worst case you might find it impossible to sell for months or even years, and you'll be stuck paying a mortgage on a house you're not living in.

A few points to consider that have not been mentioned so far:

• At least here in germany, the interest rate you can get depends a lot on the downpayment, but also on the payment plan (duration of fixed interest, rate of payment). Thus, saving until you can do a substantial downpayment would be good.
  In the end, you need to find out for you locally which factors determine the interest rate you can get, and how to adapt your planning to these.

• One psychological factor that you should consider honestly for yourself is: a mortgage enforces saving habits. Again for germany, there is a study published by IIRC Deutsche Bank that finds large differences in total wealth for homeowners vs. renters in otherwise similar socio-economic circumstances. They attribute this to mortgages enforcing saving habits (which are often kept also after the mortgage is payed off) whereas renters tend to consume more of their income. (This does not differentiate whether/how strongly people wish to build wealth, it only observes that home owners tend to accumulate more wealth, and also more wealth in addition to a fully paid home later in life)

If it is pychologically easy for you personally to save a large fraction of your income without the "help" of mortgage payments, then saving up first will be advantageous because of the lower interest rate you can get with a large downpayment. However, that does not help if you do not succeed in putting those savings together...