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Rent or buy? Mortgage rates make the difference

A good buy versus rent calculator can help you assess the cost of renting in the long run versus the cost of buying. HSH's rent Vs. buy calculator helps new home buyers compare the cost of renting for several years to the cost of buying a home.

The buy versus rent equation

Before using the calculator to help you determine the difference between renting and buying, you should consider a few points that factor into the calculations.

  • How much home can you afford? The calculator determines this based on your current (or proposed) rent payment and today's mortgage rates. The lower the mortgage rates, the less it costs to buy a home. If your rent includes utilities, estimate the value of the utilities and subtract it so that the calculator can make an apples-to-apples comparison.
  • The cost of renting also incorporates estimated future rent increases. One advantage of buying is that if you choose a fixed-rate mortgage, your payment doesn't increase over the years.
  • The cost of buying includes your down payment and the interest you could earn with the money if you didn't use it for a down payment. It also includes mortgage interest, property taxes, maintenance (including insurance), plus the costs of eventually selling the home.
  • Ownership expense is offset by your tax deduction (file a Schedule A to itemize), and property appreciation.

Running the numbers gives you an idea of how home prices, mortgage rates, and rent expenses influence the cost of home ownership to first time homebuyers.

Rent increases versus property appreciation

According to the United States Bureau of Labor Statistics' Consumer Price Index, historically, annual rent increases have averaged a little over 3%. To illustrate this cost over time, imagine that you were to rent a home for $1,000 a month now. If, every year, your rent increased at the average rate, you'd write over $570,000 of checks in 30 years and have nothing to show for it.

The flip side is that homeowners with fixed-rate mortgages do not have to deal with increasingly higher payments. Their property appreciates an average of just over 5% per year. In addition, they might get to deduct mortgage interest on their tax returns, and in 30 years, they could own their home free and clear.

Home ownership is a path to wealth

Harvard University's Joint Center for Housing Studies reports that "renters have only a fraction of the net wealth of owners. Near the peak of the housing bubble in 2007, the median net wealth of homeowners was $234,600--about 46 times the $5,100 median for renters. Even if homeowner wealth fell back to 1995 levels, it would still be 27.5 times the median for renters." Think that only applies to rich people? You'd be wrong--Harvard says working class families are unlikely to accumulate much wealth other than home equity.

First time homebuyers beware

Prospective new home buyers need to consider their plans and temperament when contemplating home ownership. Homes are expensive to buy and sell--with closing costs, real estate commissions, and mortgage fees. Keeping a home for less than three to five years could result in financial loss.

You might also think about how you'll like dealing with maintenance, because there isn't a landlord to keep the yard looking good and the appliances working. Job stability is another factor; you don't want to be saddled with a home if you have to move to take a new position or accept a promotion. Or, if you end up with neighbors who collect rusty cars and play the drums at 3 am, you won't be able to easily move away from them.

These intangibles also influence the rent-vs-buy decision, so first time homebuyers need to run the numbers and search their souls before committing to a property purchase.