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I moved to Budapest and rent my home since I started working, now I have enough savings for down payment so if I want to buy my own home in the area with a loan I can do it now.

The goal is get to get my own debt-free home in the shortest amount of time possible.

So I'm at a decision point now, if all else is equal which is better?

  • Use my savings as down payment and take a home loan and buy a home right now. And it becomes debt-free once the loan is paid off.

  • Keep renting and continue saving and investing (EDIT: into stocks/bonds) money until I have enough money to buy a home without any loan, so it's debt free after the purchase.

Most people who buy a home takes the loan. Does this mean taking a loan is always the best option? Is there a tipping point, where it's better to just save up the full price while renting and move into own home once you have all the money?

In my case I consider myself a relatively high earner and I'm able to save and invest about 2-3 times more money than what the rent costs (each month), if that matters.

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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.

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  • Relevant to this would be - what types of mortgages are offered in Hungary? In the US, fixed rate mortgages are the standard, but in the rest of the world they are almost non-existent. This means that 'locking in' a mortgage today because interest will be low for, say, 5 years, puts you at risk of interest rate increases from year 6-25.
    – Grade 'Eh' Bacon
    Sep 11 '20 at 13:12
  • @Grade'Eh'Bacon fixed-rate 20 year long mortgages exist in Hungary.
    – Calmarius
    Sep 11 '20 at 14:01
  • @Calmarius Thanks for clarifying Calmarius. In that case this is a strong point to consider - 'locking in' your mortgage at a low rate is one way to reduce your risk of future price changes.
    – Grade 'Eh' Bacon
    Sep 11 '20 at 14:04
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A few points to consider that have not been mentioned so far:

  • At least here in , 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 , 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...

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    An important element to this is, if you are a renter, set up auto-withdrawals (either from your employer or auto-transfers with your bank) that dump a fixed portion of your earnings ever month into a separate savings account. From there, have specific, set in advance points in time to use those funds to invest (in some cases you may need to wait, say, for $1000 to be in your savings account before you can make an efficient investment, whatever that is to you).
    – Grade 'Eh' Bacon
    Sep 14 '20 at 12:49
  • @Grade'Eh'Bacon: yes, "pay yourself first" plans can help. Mentally or by separate accounts dividing your savings according to the planned time frame may help as well: where I am, people traditionally save quite a lot of their incoming money - but the same term "saving" is applied whether the savings will be used for the next holidays or for pension. And a whole lot of those savings are consumed e.g. for holidays, leaving low accumulation of wealth compared to the savings rate of the wages. So empirically, the difficulty seems to be not spending rather than putting aside.
    – cbeleites unhappy with SX
    Sep 14 '20 at 12:59
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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.

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    This is only true if the rent you are paying is lower the the interest payment
    – Thomas
    Sep 11 '20 at 12:43
  • @Thomas well, interest and maintenance costs.
    – Kat
    Sep 18 '20 at 2:59
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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.

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  • In my case it's more like $800 for rent and $2000 for saving towards a house. (In different numbers but the rate is like that.)
    – Calmarius
    Sep 11 '20 at 14:42
  • I would say, on average with 20% down, that only a third of the monthly payment goes toward the house. So on that $1000 payment, it's not $1000 going towards the house, it's maybe $333 (in principal reduction). The rest is interest and taxes/insurance (escrow payment for some). This is also before the cost of repairs, which you mention and that's a great a point. In your example the $333 could be reduced down to $200 after repairs, which would make it a wash.
    – TTT
    Sep 11 '20 at 15:41
  • @ttt I did mention how a lot of a mortgage payment goes to interest. (See my 3rd paragraph.) Yes, I didn't think to mention taxes and insurance, that's a good point. If you're renting, the landlord is paying property taxes and they'll certainly include that cost in your rent. It's a good idea to have "renter's insurance" but this is way cheaper than homeowners insurance.
    – Jay
    Sep 11 '20 at 16:00
  • To give some more concrete numbers: If you got a 30 year loan at 4% for $200,000, over the life of the loan you'd pay $144,000 in interest. Not counting taxes and insurance, your payments would be $955. On your first payment, $670 of that would go to interest.
    – Jay
    Sep 11 '20 at 16:06
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    (-1) 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. That's exactly the wrong way to think about it. And your answer is actually better than this, you actually mention this! When you buy, a lot of your money goes towards the costs of the mortgage. Of course, the comparison only fully makes sense if you can buy a house that's comparable to the one you would be renting for the same monthly payment.
    – Relaxed
    Sep 11 '20 at 18:05
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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.

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    Rent payment should be compared to at least: interest cost of a mortgage, maintenance costs on the house [currently covered by landlord], and property taxes [also currently covered by landlord]. Further, impact of putting a down payment on a house vs investing it while renting should also be considered.
    – Grade 'Eh' Bacon
    Sep 11 '20 at 13:10
  • Well you do have some points there, but not all of them are correct for Hungary. Additionally even when considering some of the costs it could still be better to buy straight away as rent can offset all of them. Re Property Tax - Hungary does not have them (at least on a national level). And re investing while renting was not giving as an option (least out of the question on time of answering - this was a later edit).
    – Thomas
    Sep 14 '20 at 7:10
  • I'm not familiar with Hungarian tax law, but a quick google search seems to show around 3EUR / sq m tax; also a good answer anticipates missing important elements from an asker who needs help. In the case of home buying, it is always important to consider investing your down payment and still renting, instead of buying a property. Yes, renting can still be the best option, but the point is that the simplistic rule of thumb in the first sentence of your answer can be very misleading.
    – Grade 'Eh' Bacon
    Sep 14 '20 at 12:46

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