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Buy vs Renting a House?

calculate if you should buy or rent

Should you buy or rent?

There's not a single answer to the question if you should rent or buy a house. The details for everyone are different from every other person's needs and resources.

This mortgage calculator will account for all the financial aspects of a rent vs. buy analysis so that you may answer this question for yourself. Here's what you should be considering.

Items that impact the cost of homeownership:

  • mortgage interest
  • costs to obtain a mortgage, i.e., points, fees, etc.
  • property taxes
  • property insurance
  • possibly private mortgage insurance (PMI)
  • maintenance
  • property appreciation rate
  • inflation rate for costs

Items the impact the cost of renting:

  • rent
  • rent inflation

The discussion that follows assumes you understand how to calculate a mortgage payment using this calculator. If something is not clear, please see the additional documentation here.

Details are below

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NOTICE - Always enter (and reenter) a 0 if you want a value calculated.

Since the calculator does not recalculate the payment when the mortgage amount changes (for example), users can create an amortization schedule with whatever payment amount they desire.

Notes about the rent vs. buy calculation

This calculator creates a printable, annualized Inflation-Adjusted Cost and Appreciation Schedule in addition to the payment table. To create the schedule, make sure you check this setting on the Options Tab:

  • Check to include a cost & appreciation schedule after loan schedule
rent vs. buy result
Rent vs buy cash flow result

The bottom line of the rent vs. buy analysis is expressed in dollars here:

  • Difference Cost-to-Own vs. Rent

The result is all the inflation-adjusted homeownership costs (Total Cost-to-Own) less the sum of the inflation-adjusted rent (Total Rent (fixed costs)). Thus a negative value means that renting is more expensive than buying.

One perceived benefit of homeownership missing from this analysis is the impact of U.S. income tax deductions. The tax benefit of ownership is not what it use to be. Ever since "The Tax Cuts and Jobs Act of 2017 (TCJA)", fewer folks itemize their deductions. Additionally, there are now more limits on the deductions. So tax benefits are not included, as noted in the report.

See this Investopedia article for details.

You are free to account for the possible tax benefits by using the total tax benefit from the payment schedule, deducting it from the total cost-to-own, and recalculating the above subtraction result.

How to use the ROR

The Annualized Rate-of-Return is a net calculation. That is, to make the ROR meaningful, we deduct the rent (you have to live somewhere after all) as a fixed cost from the total cost of homeownership. If you are ready to pay $20,000 a year for rent, then the calculator's analysis will look at the difference in costs to calculate the ROR.

This is why the calculator can show a gross dollar loss and yet show a positive ROR. The ROR is the rate-of-return on the amount you spend above the cost of renting (i.e., minimum shelter).

Why do we calculate the ROR this way?

Suppose your net ROR is 2%, and you earn 5% investing. In that case, you might want to consider renting and investing the difference, even if the rent vs. buy calculation indicates that renting is the more costly option.

These settings will impact your buy vs. rent decision

Found on the "Options" tab:

  • Points - calculated using the loan amount, they are reported in the first row of the schedule. One point is one percent of the mortgage loan amount. Points, by themselves, increase the APR. However, borrowers pay mortgage points to obtain a lower interest rate. The combination of points and the lower rate should result in an overall lower APR. Check the APR option to find out. (optional)
  • Other Charges & Fees - borrowers will frequently have to pay one-time fees when applying for a mortgage. These fees and charges also impact the APR calculation. It is essential to understand what charges to include. Background APR information (optional)
  • Annual Property Taxes - are included in the escrow column on the schedule. Please be sure to enter a yearly amount in the calculator. (optional)
  • Annual Insurance - the escrow column on the mortgage schedule also includes property-casualty insurance. (optional)
  • Private Mortgage Insurance (PMI) - the lender may require PMI if your loan-to-value (LTV) is more than 80%. That is, your down payment frequently needs to be 20% or more to avoid PMI. (optional)
  • Your Marginal Tax Rate - used to calculate the personalized tax benefits of a mortgage. (optional)
  • Annual Maintenance - used in total homeownership cost and rent vs. buy analysis (optional)
  • Monthly Rent - used in the rent vs. buy analysis (optional)
  • Property Appreciation Rate (est) - estimated annual house price appreciation. Used to calculate a potential selling price for the property at the end of the mortgage. (optional)
  • Average Inflation Rate on Costs - Enter an estimated inflation rate. The calculator will adjust the ownership costs and rent by this rate. (optional)
  • Include in ROI Calculation - when calculating an ROI, you may include only the mortgage cost or the mortgage and other costs such as maintenance. Background ROI information

A thorough rent vs buy analysis can be daunting. If something is not clear, you may leave your question in the comments below

Comments, suggestions & questions welcomed...

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Canadian Loan Calculator

With Printable Loan Payment Schedule
Canadian Loan Calculator
Canadian Loan Calculator

Canadian Mortgage Calculator

  • Monthly payments with semiannual compounding.
  • Create a printable payment schedule.

How does the Canadian mortgage payment calculation differ from the U.S. payment calculation?

The formula used to calculate mortgage payments in Canada and the U.S. is generally the same, but there are some differences in the specific calculations used.

In both Canada and the U.S., mortgage payments are calculated based on the principal amount borrowed, the interest rate, and the length of the mortgage term. However, in Canada, mortgage payments are typically calculated based on semi-annual compounding, while in the U.S., mortgage payments are usually calculated based on monthly compounding.

More below

Enter a "0" (zero) for one unknown value above.

© 2022, Pine Grove Software, LLC
$ : mm/dd/yyyy

Information

Original Size
Click to make smaller (-) or larger (+).

There are other key differences as well:

  • Mortgage Terms: In Canada, mortgages are typically offered with a maximum term of 25 years, while in the U.S., terms can be as long as 30 years or even longer in some cases. This means Canadian mortgage borrowers must pay off their mortgages faster than their U.S. counterparts.
  • Down Payment Requirements: In Canada, home buyers are required to make a minimum down payment of 5% of the purchase price, while in the U.S., down payment requirements can vary based on the type of loan and the lender. Some U.S. mortgage loans require as little as 3% down payment, while others may require 20% or more.
  • Mortgage Market: The overall mortgage market in Canada is more heavily regulated than in the U.S. The Canadian government has implemented several measures to ensure that the mortgage market remains stable and that borrowers are not taking on too much debt. These measures include stress testing to ensure that borrowers can afford their mortgage payments and limits on the amount of debt that borrowers can take on relative to their income. In the U.S., there is generally less government regulation of the mortgage market.

Instructions for the Canadian loan calculator

Enter the four primary inputs:

  • Loan Amount: This is the total principal amount of the loan.
  • Number of Months: This is the length of the loan in months. You should enter the number of months that the loan will be repaid over. For example, if you have a 20-year mortgage, which is 240 months, you would enter 240.
  • Annual Interest Rate: This is the annual interest rate on the loan. You should enter the interest rate as a percentage, not a decimal. For example, if the annual interest rate is 4.5%, you would enter 4.5.
  • Payment Amount: This is the amount of each payment that you will make on the loan.

Note: You may enter 3 of the 4 values (Loan Amount, Number of Months, Annual Interest Rate, Payment Amount) and leave one value set to 0, and the calculator will calculate the unknown value based on the entered values.

The below secondary input must also be set.

  • Payment Method: Select the payment method you will use to pay off the loan. If the first payment is due when the loan originates set this option to "Advance." Otherwise, we'll assume the first payment is due one month after the origination date (when the funds are available) and in that case, this must be set to "Arrears."


Comments, suggestions & questions welcomed...

Your email address is not published. I use it only to notify you of a reply.

Let me know if you have a website. I might like to visit it.

* Required