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Rent or Buy Calculator

Should you rent or buy a home? The time tested wisdom is that you should “always” buy. The contrarians of the world a quick to say “IT’S A TRAP!”. But as things usually are, the correct answer is simply a lot more complicated than that. In this article, I will take you step by step to help you understand what you need to consider and how it might impact your decision.

For More Information About Renting and Buying, Check Out These Articles:

Everything YOU Need To Know About Buying a Home In The United States

A Data Guide to Buying A Home

Should You Rent Or Buy in Your Neighborhood

Apartment Rental Guide

Khan Academy Breaks Down The Rent Vs Buy Debate

Rent Vs Buy, 7 Things You Should Know

1) How Long Do You Plan on Living in Your Home

This is one of the most fundamental questions you can ask. Due to the high initial costs of owning, it can make all the difference. While renting has a relatively small upfront cost (deposit or first and last month’s rent), owning comes with a down payment of a recommended 20% of the value and closing costs that could equal up to 4% of the sale value.

On a $300,000 loan you could expect to pay over $10,000 in closing costs, just to have $60,000 in equity (your down payment). Even if you turn around and sell it for the price you paid, you will still end up with a $10,000 loss.

What’s more is that the way mortgages are structured, most of your monthly payments will go to interest, not to building equity. Such that even after paying your $240,000 mortgage for two years ($300,000-$60,000 down payment), you will only have paid $7,000 to the principal, and $24,000 toward the interest. So the question is, how long do you plan to stay in your next home? The more long term your plan, the better it is to buy. At the end of the day, you will spend years buying your home. If you try to do it too quickly, you will end up coming out with a net loss.

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Now, none of this is to convince you that buying misdirected. To the contrary, it could be the smartest decision you make, under the right circumstances. For instance, let’s say you expected to live in your home for 10 years, and the price of an apartment was $1,000 a month. Assuming a modest increase in rent of only 2% a year, you would still end up sinking $120,540 into your rent, and you will own 0% of it. And if you make extra payments, it can be even better!

2) How Much Does It Cost?

This might seem obvious, but it’s basic and fundamental. You need to figure out how much your perspective home and apartment costs. If you don’t have a house or apartment in mind, check out these maps to see the Median Home Price or the Median Apartment Price in your neighborhood. Try to understand how much your monthly mortgage payment is and compare in to the monthly rent you can expect to pay. Don’t forget to include all of your monthly costs associated with renting and buying. And remember, when you buy a house, you’re responsible for all maintenance costs.

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3) How Much Do you Have for a Down Payment?

This one is important. If you don’t have money saved for a down payment and closing costs, it could be difficult for you, or even prohibitive, to you buying a house. Your down payment has a huge effect on your mortgage interest as well as your PMI.

In order to find out how much you have, you need to check your checking and investment accounts, but also your retirement accounts. You can talk about the retirement experts at your bank, or your financial advisor about the best way to withdraw, or lend yourself money for your down payment.

Lastly, mortgage companies also accept gifts from immediate family and domestic partners. Be prepared that mortgage companies may ask for the account statements of those who are gifting you any money.

4) What Kind of Interest Rate Do You Qualify For?

At the time of writing this article, interest rates are relatively low, but increasing. You can get a mortgage for as low as 4.5% and as high as 5.6%. But while this doesn’t sound like a lot, it can make a massive difference. The small tick on a 30 year mortgage for $200,000 can end up costing you well over $50,000 over the term of the mortgage!

If you’re not sure what your rate is, you can click here and fill out the form to find out. They’ll even break down the different application fees and monthly bills for each mortgage company. If you want to qualify for a lower rate, you might want to try and lower your credit card balance, or payoff some of your other debts. Lastly, it’s generally considered sound advice to avoid adjustable rate mortgages. They grab you in with a lower interest rates, but adjust it over time as the market adjusts. Experts agree that generally speaking, most people should stick to fixed rates.

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5) Hidden Expenses!

They creep up on all of us. And when it comes to real estate, they will eat into your Return of Investment (ROI). Luckily for you, we are here to keep you prepared. There are a couple of things you should keep in mind including, private mortgage insurance (PMI), home owners association (HOA) fees, maintenance fees and of course, property taxes. I’ve written out an explainer for each one, and included some tips to help you prepare for each one:

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Private Mortgage Insurance (PMI): This is the insurance the bank takes out on your ability to pay your mortgage if you meet these two conditions (P.S., you pay for it). The first condition is if you take out an FHA loan. An FHA loan is a type of mortgage backed by the federal government. You will get access to a lower interest rate, and will have to put less down than a conventional loan (as little as 3.5%), but you will be forced to pay PMI throughout the entire term of your mortgage.
The second is if take out a mortgage and put less than 20% as a down payment. This isn’t as bad as an FHA loan, since you only have to pay PMI until you achieve 20% equity.

Home Owners Association (HOA) fees: If you’re buying a condo or townhouse, you might have to pay HOA fees, particularly if they offer an assortment of amenities. And be careful, because not only do they cost you money every month, but they eat away at your appreciation rate!

Maintenance Fees: If you own, you will be responsible for fixing everything in that house, whether you’re ready for it or not. Garbage compactor breaks, that’s on you. Luckily, if you buy the right house, in good condition you shouldn’t have to worry too much about these. A good rule of thumb is to estimate an average of about 1% of the home’s value on maintenance.

Property Taxes: These are kind of like HOA fees, except everyone in your town pays them. If you’re not sure how much you can expect to pay in property taxes, you can check out the map below, or zoom in with our property tax map.

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6) How Much Money Can You Make On Your Home Purchase?

This is the question everyone asks when buying. And the short answer is, it depends. If you’re like most people, your plan to generate money from your real estate investment is simply to maintain your house until you are ready to move, and expect to sell if for more than you bought it for. But how much will that be? There are also other ways to make money, like by renting out a room, or an entire apartment in your house. But how does that change the calculation, and how much can you really make doing that?

Home Appreciation: Home appreciation is a difficult thing to calculate. It depends on a lot of factors including the neighborhood, current market conditions, etc. Luckily, there is some historical data to make the whole process easier.
We know from looking at the data, that the national average appreciation rate, over the past 40 years, is 5.4%, beating out inflation by about 2%. However, we also know that there can be massive variance, depending on state, city and neighborhood. You can go here to see what the appreciation rate is currently like in your area. Just remember, if you plan on selling, you will have to pay capital gains!

Something to remember when looking at appreciation rates, is that a 1% increase can make a massive difference over the course of ownership.

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Rental Income: Buying a multi-family house, or simply renting out space in your one family is a great way to increase the money generated from your home. There are some costs, like a lack of privacy, and losing some space, but the financial impact can be huge! See the charts below to see just how much renting out space can fundamentally change the calculation of owning:

Rent or Buy Calculator

7) But None of This Matters Without Considering Your Alternatives

Ownership is great. It can be a fantastic experience that rewards you both emotionally and financially. But an investment can only be evaluated properly when you compare it to its alternatives. You not only have to consider the rent, but the rate at which the rent appreciates (is there rent control in your area?), and more importantly, how much money are you saving and what do you plan on doing with it? Economists refer to this as opportunity cost. It’s the money you are foregoing when you spend money on a home instead of spending less money on rent, and investing the difference.

If you’re saving money versus paying a mortgage, chances are you can invest it in an S&P ETF and make a better return on that particular amount of money than if you were to put it into the equity of your property. All this means that renting CAN have a better return on investment versus buying, depending on how much you can save, AND how you plan on investing that money.

Need Help Saving For Your Down Payment?

Here is a guide to some high yield savings accounts, to help you start saving.

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