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Rent Versus Buy Calculator - Watch Out!

By - 2007

You may have seen a rent-versus-buy calculator here and there online. You may have even used one. But do they really tell you what you need to know for your situation? Here's a look at how they work, and what to watch out for.

Rent Versus Buy

Essentially, the idea is to take all the costs of both renting and buying over a given time, to compare them and see which option is better for you. Of course, there will always be certain guesses involved. How long will you live in the house? What will rent be up to in ten years? How much will property taxes be? In a typical calculator, the fields will be filled in by default, and you'll change them as necessary.

For example, I just went to the U.S. Government's site, ginniemae.gov to see their rent-versus-buy calculator. The fields there start (at this time - mid 2007) with an assumption of ten years in the home, 7.5% interest, and 2% annual appreciation. You can change these as you need to. Here is what they were preset at:

Rent: $750/month
Price of Home: $150,000
Down Payment: 10% ($15,000)
Loan Term (years): 30
Mortgage Interest Rate: 7.5%
Years You'll Stay In Home: 10
Annual Property Tax Rate: 1%
Annual Home Value Increase Rate: 2%

Now, you can change any of these. Property taxes are closer to 2% of property value in some areas, for example, and over 10 years appreciation will probably be more than 2% annually (although it may be a negative number this year). In any case, hitting the "calculate" button, this is what I got:

Home Value After Appreciation: $182,849
Remaining Loan Balance After 10 Years: $117,340
Equity: $65,509
Your Tax Savings (at 28%): $32,549
Your Average Monthly Payment Over Time: Rent: $834 - Buy: $550
Total Payment: Rent: $100,080 - Buy: $66,017
Total Savings On: Buying - $34,063

This is a bit confusing, because my amortization table shows that the payment on a 30-year, 7.5% loan would be $944 per month, not $550 - and that doesn't include mortgage insurance, property taxes or home owner's insurance. Even if we take into account the tax savings, I don't know how they arrive at $550. There is this little note:

"The rent-versus-buy calculator above uses in its calculations: mortgage insurance, homeowner's insurance, loan costs, cost to sell the home, property tax, homeowner's tax savings, and rent increases. Results are estimates only. "

That doesn't clear things up, but it does point out a few other problems. Notice that there is no mention at all of repair costs. Having owned several homes, I can tell you that there is no such thing as a maintenance-free home. It also isn't clear if rising property tax was taken into account. Note too that if you are in the 15% tax bracket (likely if you are renting a $750 apartment), the tax savings would be about $15,000 less than calculated.

Near as I can figure, even at a more reasonable 6.5% interest rate, the monthly cost of owning a $150,000 home (with taxes, insurance, and minor repairs) is a minimum $1,150 - and probably $100 higher than that. That's $400 more per month than renting in the above example. Now, I am willing to bet that they don't take into account the option of investing that $400 per month savings over 10 years. It might even surpass the equity gain from owning.

Bottom line? Buying may be a good idea, especially since you probably won't invest that $400 monthly savings from renting. But do some of your own thinking, and be skeptical of these rent-versus-buy calculators.


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Houses Under Fifty Thousand | Rent Versus Buy Calculator