Rent Your Way to Retirement With a 'Rental Mortgage'

Retired couple in rental homeRenting is too often considered a stepping stone for people busy saving up for that prototypical American dream: homeownership. But what if we looked at renting as a sound investment choice, rather than a runner-up prize? There's a new school of thought doing just that.

With the disillusionment brought by the recent housing crisis, more people are choosing to rent homes rather than sink money into what can be a risky investment. (How times have changed: When your grandparents scrimped and saved for their first home, the mortgage term "underwater" hadn't been coined.)

This new group of "lifetime renters" are breaking new ground in the housing sector, making the conscious choice as 20- and 30-somethings to ignore the advice of their parents and the National Association of Realtors and settle into a long-term rental.

But without the formal structure of a mortgage helping them bank money in the form of home equity, how can they make sure they're saving enough to cover housing costs through their golden years? The radical new idea for long-term housing is to establish a "rental mortgage" for yourself.

Search Apartments and Homes for Rent See photos of apartments and homes for rent in your area on RentedSpaces Who in their right mind would elect to saddle themselves with a mortgage payment when there's not even a house to be gained at the end of 30 years? With a little discipline, the idea of setting aside an amount of money each month equivalent to what you would be paying in a mortgage is smart strategy -- and though there may not be a house at the end of the road, each payment to yourself is 100 percent principal, and you earn and keep all of the interest.

But even though it's your money deposited into an account set up by you, rule No. 1 of the rental mortgage is that you do not touch the money until you turn 65. Treat it like your IRA or any other retirement account: Hands off!

How to Set Up a Rental Mortgage (from

  • Use an online mortgage calculator like the one at AOL Real Estate to calculate what your mortgage payment would be, based on home prices in the area where you live (or the one where you'd like to retire).
  • In the "mortgage term" field, enter the number of years you have until retirement (or until you turn 65). For instance, if you're 30 years old now, put in 35 years.
  • When you calculate your mortgage payment, click on the "Show/recalculate amortization table" button, which will show what you would pay in principal and interest each month. For instance, a $200,000, 30-year mortgage with a 5 percent interest rate would have $240 going to principal in the first month. Each month, the payment amount allocated toward principal gets larger, while interest paid to the bank gets smaller.
  • You can save the full mortgage payment, or just the principal. By depositing the principal amounts into a savings account for the next 35 years, by the time you turn 65 you should have accumulated, in our example, $200,000 -- plus interest.

It's a radical new way of thinking about one of the biggest investments you'll ever make, but if recent history has taught us anything about the housing market, a new way of thinking is sometimes just what we need.

See more perks of renting vs. buying a home.

Not sure renting is right for you? Here are some AOL Real Estate guides to help:

More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.

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This is an extremely insightful alternative plan to home ownership. In many areas of the U.S. renting is cheaper than owning a home in pretax dollars. However what few people realize is that home repairs and home maintenance expenses are an offset to income tax savings.

Another point to consider is that in some parts of the Country landlords pay one or more of a renters utility expense. In my geographical region Landlords commonly pay for water and sanitation a bill that runs roughly 750 dollars annually. This utility expense added into the AOL mortgage calculator shows my rent expense to be half of what home ownership would be.

I am going under the assumption that the home repairs and maintenance expenses would be equal to whatever tax break there might be gained by being a homeowner and am convinced that an equal amount of money equal to my monthly rent set aside and invested conservatively over a term equal to a 15 year mortgage would provide a higher standard of living at retirement.

December 21 2010 at 1:26 PM Report abuse rate up rate down Reply

I do believe that this makes sense

December 21 2010 at 11:40 AM Report abuse rate up rate down Reply