Buy vs Renting a House?
Should you buy or rent?
There is no single, universal answer to whether it makes more sense to rent or buy a home. Each situation is driven by individual financial goals, timelines, resources, and risk tolerance.
This mortgage calculator evaluates the full financial picture behind a rent-versus-buy decision so you can determine which option is more advantageous in your specific circumstances. The analysis considers the following factors.
Costs that impact homeownership:
- mortgage interest
- costs to obtain a mortgage (points, fees, and related charges)
- property taxes
- property insurance
- private mortgage insurance (PMI), when applicable
- maintenance
- property appreciation rate
- inflation affecting ownership costs
Costs that impact renting:
- rent
- rent inflation
This discussion assumes you are comfortable calculating a mortgage payment using this calculator. If anything is unclear, review the additional documentation available in the Mortgage Calculator section.
Details are below…
The Calculator-Calculate Down Payment, Payment, PMI, Rate and Term
Information
NOTICE - Always enter (and reenter) a 0 if you want a value calculated.
Because the calculator does not automatically recalculate the payment when the mortgage amount changes, you can create an amortization schedule using any payment amount you choose.
Notes about the rent vs. buy calculation
This calculator can create a printable, annualized Inflation-Adjusted Cost and Appreciation Schedule in addition to the payment table. To include this schedule, enable the following setting on the Options tab:
- Check to include a cost & appreciation schedule after loan schedule
The bottom line of the rent-versus-buy analysis is shown here:
- Difference Cost-to-Own vs. Rent
The result equals all inflation-adjusted homeownership costs (Total Cost-to-Own) minus all inflation-adjusted rent (Total Rent (fixed costs)). A negative value means renting is more expensive than buying.
One commonly cited benefit of homeownership that is not included in this analysis is the impact of U.S. income tax deductions. Following the “Tax Cuts and Jobs Act of 2017 (TCJA)” (and assuming no material change under future legislation), fewer taxpayers itemize deductions. Some limits have changed, but the benefit is often smaller than many expect. Therefore, tax benefits are excluded, as noted in the report.
See this Investopedia article for additional background.
You may still incorporate potential tax benefits manually by subtracting the total tax benefit from the payment schedule from the Total Cost-to-Own and then recomputing the difference.
How to use the ROR
The Annualized Rate-of-Return is calculated on a net basis. To make the ROR meaningful, the model treats rent as a baseline cost because you must live somewhere. If you are prepared to spend $20,000 per year on rent, the calculator measures the difference in costs and computes the ROR on the incremental amount you spend to own.
This is why the calculator may show a total dollar loss yet still produce a positive ROR. The ROR reflects the return on what you spend above the cost of renting (minimum shelter).
Why calculate ROR this way?
If your net ROR is 2%, but you reasonably expect 5% from investing, you may decide renting and investing the difference is preferable—even if the rent-versus-buy calculation shows renting as the more expensive option.
These settings will impact your buy vs. rent decision
Found on the “Options” tab:
- Points — calculated using the loan amount and reported in the first row of the schedule. One point equals one percent of the mortgage. Points alone increase APR, but borrowers often pay points to obtain a lower interest rate. Use the APR option to evaluate the combined effect. (optional)
- Other Charges & Fees — one-time application and closing charges impact the APR calculation. Understand which charges qualify. Background APR information (optional)
- Annual Property Taxes — included in the escrow column. Enter an annual amount. (optional)
- Annual Insurance — property-casualty insurance appears in the escrow column. (optional)
- Private Mortgage Insurance (PMI) — may be required when loan-to-value exceeds 80%. (optional)
- Your Marginal Tax Rate — used when estimating personalized mortgage tax benefits. (optional)
- Annual Maintenance — included in total ownership cost and rent-versus-buy analysis. (optional)
- Monthly Rent — used in the rent-versus-buy comparison. (optional)
- Property Appreciation Rate (est) — estimated annual price growth used to project a possible future sale price. (optional)
- Average Inflation Rate on Costs — adjusts ownership costs and rent for inflation. (optional)
- Include in ROI Calculation — choose whether ROI includes only mortgage costs or mortgage plus other costs such as maintenance. Background ROI information
A comprehensive rent-versus-buy analysis can feel complex. If anything is unclear, leave your question in the comments below.
Comments, suggestions & questions welcomed...