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Lincoln Bell
Lincoln Bell

Rent Vs Buy Home Calculator

Should I rent or buy? This is the all-important, life-changing question every potential homeowner will face. For our Rent vs. Buy Calculator, we evaluate the decision from a purely financial standpoint. We base the calculations on many assumptions, such as constant home value appreciation rates and constant rental fee increases rates in the future. We assume the user can afford to either buy or rent. We strive to give users the best results possible. However, because our calculator cannot precisely predict the future, the result is an estimate based on input values only. Also, this calculator is intended for use by U.S. residents only.

rent vs buy home calculator

In the real world, numbers cannot reflect many intangible human elements involved in the Rent vs. Buy question, such as the value of homeownership or not having to deal with landlords. Sometimes, buyers want the ability to do things such as paint their walls a specific color or house ten cats without hearing complaints from landlords or neighbors. Conversely, renters might prefer the peace of mind that comes with a predictable monthly rent instead of paying a large upfront down payment and closing costs. Whether renting or buying, consumers need to factor personal preferences into this decision.

Homeownership is a relatively new phenomenon in society. It did not become easily accessible to the average Joe until the mid-twentieth century. Before this time, homeownership was common only for the wealthy.

In the U.S. today, homeownership is as American as bald eagles and hot dogs. Moreover, the federal government offers tax incentives for owning a home, a strong reason not to rent. Furthermore, many believe that mortgages build equity. Considering these factors, one can easily see why buying seems to make more sense than renting, at least on the surface.

While a mortgage can technically build equity, it is not significant in most cases. Robert Shiller, a leading economist, conducted a study of home prices in the twentieth century. His study found that the average appreciation rate for home prices after adjusting for inflation came to only 0.2%. Moreover, after factoring in yearly maintenance, repairs, and annual property taxes, most homeowners will find that their home purchase investment merely breaks even.

However, home markets vary widely across different regions. A house in San Francisco will appreciate at a very different rate than a comparable home in Wyoming. Hence, the decision to buy may come down to intangible factors. For most people, primary homeownership is an investment in family, long-term stability, happiness, and shelter, not a speculative way to increase the dollar amount of their total assets.

Owning a home also includes some one-time transaction costs and recurring maintenance costs. The former mainly refers to the costs associated with buying and selling the house, such as the down payment, closing costs, and commission fees. After adding such expenses, the cost of buying and selling a house can be very high, often reaching 10% or more of the home's value.

The recurring maintenance costs mainly refer to the four most significant costs associated with homeownership called PITI, an acronym standing for principal, interest, taxes, and insurance, charges typically in descending order by amount. PITI does not cover all costs, but this abbreviation represents the largest expenses.

The principal is the amount borrowed from the lender. It builds the highly sought-after equity of the home. It is part of the monthly mortgage payment and often represents the most sizable portion of the PITI. Also, it is the only part of the PITI that accumulates equity.

The second part of the monthly mortgage payment is the interest, which is the cost of borrowing the money, usually a percentage of the principal. Banks typically express it as an annual percentage rate or APR. Mortgage interest is tax-deductible, something homeowners should not forget during tax season!

Property taxes are annual levies paid to the home's city, county, school district, or other ruling jurisdictions. Prospective buyers can find a ballpark figure for the annual property tax of any home by going to the website of the ruling jurisdiction's appraisal district. This information is usually public, and in most places, homeowners will pay between 1% and 3% of the home's value annually. The Rent vs. Buy Calculator requires both the annual amount in tax due each year and a forecasted percentage increase to calculate more accurate results.

Lenders typically require buyers to obtain homeowners insurance for disasters such as hurricanes and fires. In addition, traditional home loans with down payments of less than 20% will generally require private mortgage insurance (PMI), which protects lenders in case of a default. Some owners also purchase a homeowners' warranty, which can help with repair costs.

Rent is the act of paying a landlord for the right of use on a residential property. The primary cost of renting a home is the monthly rental fee. Other costs include the security deposit, application fee, and possibly, insurance.

A rental home is typically considered a temporary residence. Its main advantage is the flexibility of negotiable lease terms, which generally range from a few months to a few years. Therefore, it makes sense for those with an uncertain future to rent instead of buy.

Purchasing a home typically involves a considerable upfront price, including the down payment, closing costs, fees, and other expenses. Hence, the first step when deciding to buy a house is to see if one's available savings will cover the upfront costs. Please use our House Affordability Calculator to estimate the ability to cover these costs.

The time one intends to stay in the house is probably the most critical variable in determining whether to buy or rent, assuming a buyer can afford both. As a general rule of thumb, the longer the intended stay, the more it makes sense (financially) to buy. Otherwise, one should consider renting. Typically, owning a house involves significant one-time buying or selling costs. Compared with renting a similar home, the recurring maintenance cost is lower than the monthly rental fee. If one stays in a house long enough, it justifies the massive buying and selling costs and makes the average total monthly cost of owning a home lower than renting.

Our Rent vs. Buy Calculator above can estimate the minimum period required for buying to make sense over renting. If one plans to stay in the house for less than the minimum time of residence, it is financially wise to rent. Otherwise, buying makes more sense. This number can vary based on both personal life situations and the region where one lives.

Our buy vs. rent tool builds one model calculating all of the relevant costs of owning and a different model including all of the costs of renting. Next we figure out the tax consequences of buying a home (we calculate taxes at the federal, state and local level) and consider how home value appreciation and mortgage payments impact your equity in the property. Once the models have calculated all of the costs of owning and renting we compare the two in order to show you how long you need to stay in a property for buying to make more sense than renting.

First we start with the upfront expenses. Depending on where you want to move and the mortgage type, we estimate all of the relevant expenses required to close on a home purchase. This includes your down payment, local taxes, title insurance, mortgage fees and other expenses down to the appraiser's fee for assessing the value of your home.

We then look at the annual costs, which include your mortgage payment, real estate taxes, homeowners insurance, maintenance expenses and, if relevant, mortgage insurance and HOA fees. It is important to note that our models use actual mortgage data from our partners, so the mortgage payments, amortization and any other related fees are all based on real mortgages that you could use to buy a property of the stated value.

Calculating rental expenses is more straightforward. We take the initial rent amount you entered and then use the inflation rate, which you can also adjust, to calculate rental payments in the future. You can also add rental insurance or other expenses at your discretion.

Rental payments, by contrast, have no such advantages. While a portion of each mortgage payment goes toward raising your stake in your home by increasing your equity, rental payments go entirely to your landlord and tend to grow over time as rental prices increase. In the long run, the costs of renting can be much higher than buying.

Many renters, for example, enjoy the flexibility of being able to change apartments and neighborhoods at the end of their lease. If you no longer like the area you live in or have to move for a job, renting makes life much simpler.

For a long time, the common wisdom was that buying a home was a far better financial choice than renting one. As home prices across much of the country marched upward during the 20th century, a house was considered the safest investment around.

The logic was simple: if you were spending 30% of your income on housing, you might as well spend that hard-earned cash on something that would retain its value for you in the future. Renting, by contrast, was wasteful. The rent vs. buy decision traditionally was a straightforward one.

Today, there is no clear answer to the rent vs. buy question. In some cities, and for some individuals, buying a home may make more sense, while for others, renting a home may be the better choice. This makes it even more important to run the numbers and see what is best for you and your family.

In the end, the rent vs. buy decision comes down to your preferences, plans and personal finances. If you know exactly how long you want to stay in your home and where you want to live, and you have some money saved up, the decision could be as easy as calculating which option will cost you less. If your future is less clear, however, you may have more to consider. 041b061a72


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