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Mega Data Table! (detailed results of Rent vs.
Buy)
In
pink-row years renting is better. In
green-row years buying is better.
Explanation and Discussion
It's usually better to buy than to rent, but not in
every case, and usually not right away. It usually takes
at least a few years for buying to become a better deal than
renting. That's because there are some big up-front costs
with buying, and your monthly payments from buying are
generally higher. However, those payments are building
equity in your home -- you're "keeping" some of what you're
paying. Also, while you're making your payments, your home
generally appreciates in value. After some number of years
the equity you've paid into your home plus the appreciation
will overcome the extra money you had to pay to get into the
home. That's what this calculator tells you.
Any calculator is only as good as the assumptions.
Probably the biggest assumption in this calculator is the
appreciation rate. If your
home appreciates faster than the value listed in the
calculator, buying will be a much better deal than the
calculator shows. If your appreciation is less than what you
input, buying won't be as good as the results say, and could
even be worse than renting. Another assumption is that if
you rented, each year you'd invest the money you save by
renting. If you don't actually do this, or if your rate of
return is different than what you feed the calculator, the
results won't be accurate.
Also remember that "better" and "worse" are subjective
terms. If it costs $25,000 more over 30 years to buy a
home rather than to rent, you still might consider buying to
be a "better" deal because it's worth the small difference
in cost (less than $1000 a year) for the pride and comfort
of owning your own home. The calculator simply reports
results based on some assumptions; it doesn't tell you what
you should do. Only you can make that decision.
There's built-in help for most of the items in the
calculator. Just point to any field name and a little
box will come up to explain it in more detail. Below I'll
cover just the things that aren't included in the help, or
which bear repeating.
The most important part of the calculator is the blue
"Results" section. This tells you whether buying or
renting is the better deal. The results are after a certain
year. The default is the same number of years as the
mortgage. But you can tell the calculator to give you
results for a longer period of time, by changing the "Show
results after year #" box. For example, if you get a 30-year
loan, you could tell the calculator to compare buying vs.
renting after year 40.
Anyway, let's take the results in the Results summary
table line-by-line.
Cash Spent. This is how much it cost you
to either buy your home or to rent. For buying, it
includes your down payment, your monthly payments,
PMI, taxes, insurance, and
maintenance. For renting, it includes just rent. You'll
almost always pay more to buy a home than to rent. What
makes buying a better deal is that you build equity in
your home.
Paid Equity & Appreciation. "Equity" is the
amount of your home that you own. There are two kinds of
equity, Paid Equity and Appreciation. Paid Equity is the
portion of your loan payments that actually paid down the
loan. That is, it's the non-interest portion of your loan
payments. Once you've made all your payments, this amount
will equal the original purchase price of the home.
Appreciation is how your house increases in value over
time just by sitting there, kind of like inflation. So
even though it usually costs more to buy than to rent,
your costs are offset by this value you have in your
home.
You might think, "What good is equity? The money is
locked in the house. I can't eat my home." Ah, but the
equity does benefit you. Here are just two
examples of how. First, once your home is paid off, your
equity has earned you the right to stop making any more
mortgage payments. Second, any time after you turn 62 you
can get a Reverse Mortgage, which lets you cash out the
value of your house (either as a lump-sum or a monthly
amount), while still living in the house. In fact, as
long as you live in the house, you don't have to pay the
Reverse Mortgage back! That will be up to your heirs, but
it will be easy for them to do so, since they can just
sell the house to get the money.
I reject the idea that homes appreciate faster than
the general rate of inflation, as I explain in my
separate article about
appreciation.
The total value of the home is reduced by 6% for the
sales commission you'd have to pay if you sold your home.
If you're sure you won't sell and want to see the home's
value without a sales commission taken out, just choose
"0%" for the "Commission paid on sale".
The total value of the home is reduced by the tax
you'd pay on the sale, unless you turn off the "Capital
Gains on Sale" box. Most homebuyers won't actually pay
any tax, since they either won't sell their home, or the
home didn't appreciate enough to be subject to tax -- you
get to keep the first $250,000 of gain free as of 2009,
and the calculator assumes that this amount increases
with the rate of maintenance inflation.
Net spent, without investing. This is how much
you're "out" by buying vs. renting, assuming that you
didn't do any investing as a renter. It's everything you
paid out less the value you built. For buying, that's all
your expenses, which are offset by the equity you have in
your home. As a renter who didn't invest, you don't have
any equity. But some renters do invest, and that's what
the remaining lines cover.
Return on investment. Since it generally costs
more to buy a house than to rent, at least in the early
years, some people invest the money they save by renting
instead of buying. For example, they put that money into
mutual funds. That way they can build an investment, too,
just like a homeowner. But while this does improve the
value of renting, it's usually not enough to make renting
better than buying. That is, it's usually still better to
buy than to rent. The calculator can tell you for sure.
Note that some people prefer to go with this "invest the
difference" strategy even if it's a worse deal because
they don't want to get tied down to a home, or they know
they won't own the home long enough to make it
profitable. Do note that you only get the value of
investing the difference if you religiously invest
all the savings you get from renting instead of
buying. I'm not sure most people are disciplined enough
to do this, and if you fail to invest properly then you
won't get the kind of returns listed in the calculator.
That's another nice thing about buying a home -- it's a
kind of forced, automatic investment.
The Return on Investment
listed is just that -- the return on the
investment. That is, it doesn't include the principal of
the investment itself. We compare apples to apples for
renting vs. buying because on both sides we consider only
the return generated. We do this on the renting side by
listing only the return, and never counting the principal
we paid in. We do this on the buying side by figuring the
principal we paid in, but then subtracting it out again.
Finally, note that the investment value shown in the
calculator is the net amount after estimated
capital gains tax. Of course, you can change the capital
gains tax rate in the calculator.
(By the way, for simplicity the
calculator assumes that all the savings from renting
instead of buying is invested at the beginning of the
year, even though the savings actually occurs throughout
the year. The difference is negligible and I don't
consider this an error for the purposes of claiming the
"Find A Bug in the Calculator" prize.)
Net spent (bottom line). This is the final
comparison of buying to renting. It's the total amount
you're "out", considering how much you spent less any
value you built. Since this is the net amount you spent,
the lower number wins. Whichever side is lower, that side
is the better deal.
Mega Data Table results explained
This table shows detailed results for 19 separate
variables, year-by-year. And for the most part it's
unnecessary. Most people can get what they need from the
blue Results summary box in the calculator. But for those
who want extra data, it's all here. I'll explain about it
now.
Years
This calculator gives you a couple of things
most other calculators don't: a complete listing of all
variables for every single year, plus the ability to look
far into the future. Here you always get a full 40
years' worth of data.
Years in which renting is better than buying are shown
in pink. Years in which buying is better than renting are
shown in green. The comparison assumes that money saved
each year by renting instead of buying is invested
elsewhere.
All figures are as of the end of the year
listed.
Loan Details (when buying)
Interest
This is the interest you pay to the bank each
year for the mortgage loan. Notice that it goes down a
bit each year. That's because you're paying interest only
on the outstanding debt, and your debt goes down through
the years as you make payments. Every month a smaller
portion of your payment goes to interest and a higher
portion goes towards principal -- paying down your debt.
Here's more on how mortgage
interest is calculated.
Balance
The Balance is the amount outstanding on your
loan. The initial balance includes closing costs, if you
chose to roll those into the loan. The balance goes down
each year as you make your monthly payments. Notice that
it goes down very slowly at first and then very quickly
at the end. That's the nature of mortgage interest. See
the page about mortgage
interest to understand more.
Buying (cash out)
Payment
This is how much you pay the bank each year
towards your loan, not including taxes, insurance,
and PMI, which are listed in the table separately. Of
course, you're making payments monthly, but the table is
summarized by year for simplicity. Notice that your
payment never changes over the life of the loan. This is
one of the big advantages of buying a house: you lock
in your monthly payment. When you rent, your rent
goes up constantly with inflation. But when you buy you
get to lock in your payment. This advantage is rarely
mentioned for some reason, but it's power shouldn't be
underestimated. The amount you pay for taxes, insurance,
and maintenance goes up each year with inflation, but the
biggest part -- the monthly payment -- stays the same.
In Year 1 this column also includes your down
payment.
PMI
PMI is private mortgage
insurance, which you usually have to pay when your
down payment is less than 20%. It protects the lender if
you fail to make the payments, they have to foreclose on
your home, and they can't sell it for as much as the
outstanding debt on your loan. (The insurance will pay
them the difference between your actual down payment and
a 20% down payment.) PMI is automatically canceled when
you've paid off 22% of the loan balance, which is why its
value in the table goes to 0 in about year 11 on a
30-year loan. The calculator assumes you have to pay PMI
if your down payment is less than 20%. Some people get a
second mortgage loan to avoid PMI. For example, they get
a primary loan for 80%, a second loan for 10%, and put
10% down. This is called 80/10/10. This isn't a "free"
solution, since the second mortgage carries a higher
interest rate than the primary mortgage, so you're still
gonna pay some extra (compared to making a real 20% down
payment). But the extra interest penalty is usually less
than the PMI cost. You'll need to run the numbers for
your own particular situation to see which is the better
deal.
The cost of PMI in the calculator is estimated. The
actual cost depends on a few different factors, including
your credit score. (The better your score, the less the
PMI.)
Taxes & Insurance
When you own a house you have to pay property
taxes to your local government, and you have to pay an
insurance company for a policy to reimburse you in case
your house burns down. Your lender will make this easy by
adding these amounts to your monthly mortgage payment,
and then once a year your lender will pay your taxes and
insurance for you. This is called 'escrow', and there's
no charge for this service. If you prefer, you can pay
your taxes and insurance yourself, separately. If you
want to do that, just let your lender know before the
papers are signed, because this decision affects how the
loan papers are drawn up.
The calculator estimates taxes and insurance but you
can enter your own value if you like, and lock it in with
the lock box.
Either way, the calculator increases this amount each
year to account for inflation. The inflation rate is
whatever Appreciation Rate is selected.
Maintenance
This is how much you'll spend each year on
average keeping the house in good shape. If this seems
excessive, consider that every 10-15 years you'll likely
need a new roof, a new exterior paint job, and a new
AC/furnace, each of which will cost several thousand
dollars. You can avoid the roof replacement cost by
getting a metal roof which will last longer than you (and
which will lower your cooling bills). You can avoid the
repainting cost by getting a brick house instead of wood.
The calculator estimates the annual maintenance cost,
but you can enter your own value and lock it in with the
checkbox.
The calculator adjusts the annual maintenance amount
for inflation each year."
Tax Savings
U.S. homebuyers get a piddling deduction on
their federal taxes for a portion of the mortgage
interest and PMI, paid, if they itemize, and only if
their itemized deductions are above a certain amount.
This is really a handout
to the rich in disguise, since the rich buy bigger
homes and pay more mortgage interest. If no one got a
mortgage interest deduction, overall tax rates could
easily be lower.
The Tax Savings column is controlled by the "Mortgage
Interest Deduction" field in the calculator. If you know
you're not getting this deduction (e.g., you don't
itemize deductions, or you live in a country which
doesn't offer this deduction), you can turn off the
Mortgage Interest Deduction in the calculator.
Cash out
This is how much money you spent towards your
home in a given year. It includes your mortgage payments,
PMI (if any), taxes, insurance, and maintenance. In year
1 it also includes your down payment, and initial
maintenance and closing costs if not rolled into the
mortgage (which might not be obvious). But notice that
year 2 costs less than year 1. That's because in year 2
there's no down payment or initial maintenance. Then the
cost starts rising in future years with inflation. Then
when your mortgage is paid off the Cash out per year
plummets, since there's no more mortgage payment. This is
year 16 or 31 for 15- and 30-year mortgages respectively.
But something else special happens well before that in
most cases: The cash you spend for buying each year
becomes less than the cost of renting! When this
happens I highlight those cells in a darker green. Buying
becomes a better deal even before you consider all
the equity you have in the home. You actually
spend less to buy than to rent! So much for the
idea of renting and "investing the difference" that some
people favor. When buying becomes cheaper than renting,
there is no difference to invest.
Total cash out
This is the running balance of how much you've
spent on your house to date. It's the sum of the Cash Out
column for all years up to that point. You can compare
this to the "Total Rent" column to see the running
balance of rent paid. But this doesn't tell you whether
buying or renting is a better deal, because that doesn't
take into account the equity you've built in your home.
That's answered in the last column, Rent vs. Buy.
(Negative values mean renting is better, positive values
mean buying is better.)
House Value
Paid Equity, Appreciation, and House Value
All three columns are running balances
(i.e., the balance to date), not the amounts for just the
year listed.
Equity is the portion of your home that you own
(vs. the outstanding amount of the mortgage). There
are two kinds of equity. The first is Paid Equity, which
comes from your down payment plus the principal portion
of all the loan payments you made. The other is
Appreciation, which is amount your house increases in
value just by sitting there. Your house gets more
valuable automatically as time passes, kind of like
inflation. You can set the rate of appreciation in the
calculator, but the default value of 3.5% is probably the
most accurate for long-term use. (Many people think that
homes appreciation faster than the general rate of
inflation, but I don't think that's true, as I explain in
my article about
appreciation. I strongly suggest you not set the
appreciation rate higher than the inflation rate.)
The Total Value is the original price, plus
appreciation.
The amounts shown have been reduced by the
commission you'd have to pay if you sold your house.
(If you believe you can sell your house at a lower
commission rate or with no commission at all, you can
change the "Commission paid on sale" rate in the
calculator.)
They've also been reduced by the taxes you'd pay on
the sale, though in most cases you won't pay any
taxes if and when you sell. (And again, you can turn off
the tax calculation by unchecking "Estimate capital gains
tax on sale".) Most homebuyers won't actually pay any
tax, since they either won't sell their home, or the home
didn't appreciate enough to be subject to tax -- you get
to keep the first $250,000 of gain free as of 2009, and
the calculator assumes that this amount increases with
the rate of maintenance inflation. This contrasts with
investing the cash saved by renting as a renter, where
you'd have to sell your investment in order to
cash in on it, and thus would have to pay taxes. When you
own a home you can enjoy the value of your investment
without selling it, by either continuing to live in it
after you've paid off the mortgage (at which point you
have no more mortgage payments), and optionally getting a
reverse mortgage at any time after age 62, which allows
you to extract cash value from your home in either a
lump-sum or as monthly payments, and which you won't have
to pay back as long as you live in the home. (Your heirs
pay back the reverse mortgage loan, but it's easy for
them to do so, since they simply just sell the house to
get the money.) Next, even if you sell your home, you
likely won't owe any taxes, since a huge portion of any
gain on the sale is tax-free ($250,000 for single filers
and $500,000 for married-filing-jointly, as of 2009). If
you bought a house for $200,000 and sold it for $440,000,
you would have profited by $240,000, but you pay no taxes
on that. In 30 years your gain on a sale might be higher
because of inflation, but we can expect that the
$250k/$500k exclusion will also rise after 30 years with
inflation, too. And if you do owe any taxes, in will be
only on the small portion of the gain that's above the
exclusion amount, and even then the current (2009)
long-term capital gains tax rate is only 15%.
Note that if you rolled the closing costs into the
mortgage, then some of the "principal" portion of your
mortgage payments goes to pay for those closing costs and
doesn't actually build any equity. Therefore the Paid
Equity will be a little less than Down Payment + Payment
- Interest.
Renting
Rent, Total Rent
Rent gets more expensive each year with
inflation, and the calculator accounts for that.
The Total Rent column is the running balance -- it's
the sum of all rent paid up until that point.
Return on Investment (ROI)
Some people take the money saved by renting
instead of buying and invest it (e.g., into mutual
funds). If you're not buying a house, you should
certainly invest in something, otherwise you have no
investment.
he Return on Investment listed is just that -- the
return on the investment. That is, it doesn't
include the principal of the investment itself. We
compare apples to apples for renting vs. buying because
on both sides we consider only the return generated and
not the principal. We do this on the renting side by
listing only the return, and never counting the principal
we paid in. We do this on the buying side by figuring the
principal we paid in, but then subtracting it out
again.
The ROI column is the return of your investment to
date (not the value for just that particular year). The
amount invested each year is the "Cash Out" for that year
minus the Rent paid. The return on investments is set by
the "Interest on investments" field in the calculator,
with a default of 5.5%. The Investment value shown is
after taxes are taken out, according to the "Capital
Gains tax rate" field in the calculator, with a default
of 15%.
(By the way, for simplicity the
calculator assumes that all the savings from renting
instead of buying is invested at the beginning of the
year, even though the savings actually occurs throughout
the year. The difference is negligible and I don't
consider this an error for the purposes of claiming the
"Find A Bug in the Calculator" prize.)
Rent vs. Buy Conclusion
Buying Net
At long long we can finally start to really
compare renting vs. buying. Whew.
The "House Net" is how much you're out after
considering the value you've built. It's the value of
your house (what you could sell it for), less any
commissions and taxes on the sale, less any outstanding
balance on the loan, less everything you paid to buy the
house, plus any tax benefit you got from buying. Since
this figure is how much you're "out", the lower the
better. Negative values are especially good, because they
mean you basically lived for free -- you got more value
from your home through appreciation than what you paid
out to buy it.
Renting Net
"Rent Net" is how much you're out after
considering the value you've built. It's everything
you've spent on rent, minus the value of your investment
(after subtracting out taxes you'd owe on the sale). If
you're not investing as a renter, your net would be even
lower than what's shown here.
Since this figure is how much you're "out", the lower
the better. Negative values are especially good, because
they mean you basically lived for free -- you got more in
return from your investments than what you paid out in
rent.
Rent vs. Buy
At long last, this column shows whether
buying or renting is better. Negative values mean
renting is a better deal, positive values mean buying is
better. Almost all scenarios start off with renting being
a better deal (because there some big upfront costs when
you buy a house), but after some number of years buying
becomes a better deal. Years in which renting is better
are shaded in pink, and years in which buying is better
are shaded in green.
We get the value by comparing the "Buying Net" with
the "Renting Net". That is, we compare how much
you're "out" in each case. The smaller the figure, the
less you're out, so the side with the lower figure wins.
If one side is negative and the other is not, the
negative side wins, because that's the side that's
lower.
Why this calculator is the best around
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MichaelBluejay
.com
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NY
Times
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Yahoo
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Motley
Fool
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Smart
Money
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Most important features
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Includes sample values so you can see a
comparison right away
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Automatically calculates PMI, closing costs,
taxes & insurance, and maintenance based on the
purchase price
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Automatically recalculates when you change any
value
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All input and results are shown the same
page
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Shows you the results year-by-year (not just at
the end of the mortgage term)
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Shows the value for 18 separate
variables, for every single year
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Shows results for 40 years into the future
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Built-in help for every input field
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Entering values
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Sample values already filled in for all
necessary fields
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Sample values are realistic
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n/a
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n/a
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Can see all variables at the same time (i.e.,
when you're viewing something, it doesn't hide
something else)
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Allows you to specify the % down payment (vs. a
raw amount)
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Allows closing costs to be rolled into mortgage
or not
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Allows closing costs, taxes, insurance, and
maintenance to be entered in raw dollars (vs.
percent)
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% sign is on the wrong side of the fields
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Forces you to decide how long you expect to stay
in the home before you can even see any results
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Too stupid to strip out a $ sign or comma that
you might accidentally enter into a field
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Forces you to explicitly enter a value for every
field even if the value could be zero
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Refuses to accept 0 as a valid entry for fields
where that should be okay (e.g., Renter's
Insurance)
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Calculation
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Automatically recalculates when any value is
changed
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Shows you the down payment amount based on the %
down payment
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Automatically calculates the amount of the
loan
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Estimates closing costs for you
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Automatically estimates the cost of taxes
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Automatically estimates the cost of
insurance
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Automatically estimates the cost of
maintenance
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Results
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Can see all variables and results at the same
time
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Shows rent vs. buy results side-by-side
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Shows numerical details at end of mortgage
automatically after calculating
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"Shows its work"
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Results are clear and unambiguous
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Results are detailed
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Lets you do another comparison on the same page
(i.e., doesn't force you to use the Back button to
try another scenario)
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Completeness
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Accounts for closing costs
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Accounts for initial maintenance
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Shows a table with the values of each of 19
separate variables for every single year
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Calculates 40 years into the future
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Other
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Loads instantly
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Detailed explanations of each field
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All text is searchable
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Rollover help included for each field
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Other inline help included for each field
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Inline help is an annoying popup window which
you're forced to close when you're done
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Spawns an annoying popup window to run the
calculator
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Renting compared to
buying
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Renting
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Buying
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What You Pay For
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Rent
(and
possibly renter's
insurance)
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Once
* Down Payment
* Closing Costs
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For 15-30 years
* Mortgage Payment
(principal + interest)
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Forever
* Taxes
* Insurance
* Maintenance
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What You Can Deduct on your Taxes
(in the U.S.) (footnote)
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Nothing
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* Interest on mortgage, PMI, and property taxes
(only if you itemize on Schedule A
instead of taking the Standard
Deduction)
* If it's rental property, you can also deduct
insurance, maintenance, and depreciation on the
portion rented, whether or not you itemize. If it's
a duplex and you live in half and rent the other
half, you can deduct half of these costs.
* When you sell your home, you don't have to pay
any taxes on the gain, in most cases. Whoa!
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How you can build an
investment
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Take the money you would have spent on a down
payment for a house and on high monthly mortgage
payments, and invest in something else instead,
such as a socially-responsible
mutual fund. However, this is rarely as
profitable as buying a home.
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Your house is your investment. Part of each
monthly payment builds equity in your home. Your
house also gets more valuable over time just by
sitting there, which is called appreciation. There
are three ways you can capitalize on this
investment:
(1)
Sell your home, even before it's paid off, and
receive the equity you built.
(2)
No longer have to make mortgage payments once the
loan is paid off.
(3)
Any time after you're 62, get a reverse mortgage,
which pays you most of the equity you've built in
cash, either as a lump-sum or as monthly payments.
You don't have to repay this as long as you live in
your home, your heirs do. (They can either sell the
house to pay off the reverse mortgage, or move into
the house and start making monthly payments.)
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How you could screw up this
investment
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Fail to invest your extra money somewhere else.
In that case, you have no investment.
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Possible mistakes include:
- Paying more than the house is worth
- Paying more than you can afford
(in which case you could lose
the house by failing to make
payments)
- Paying too much interest, by getting an
ARM mortgage with
unfavorable terms, or failing to refinance a FRM
when rates drop.
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Pros
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* Simple
* Start investing right away, without having to
save for a down payment
* Easier to move if you decide to relocate
* No cost or effort spent on maintenance
* If your rent is low enough, this could be a
better investment than house-buying.
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* Pride and satisfaction in owning your own
home.
* Ability to customize the home exactly how you
want.
* Money that you pay towards the principal on your
loan each month increases the % of your home that
you own. In effect, you're paying yourself.
* Mortgage payment stays the same over 30 years. If
you were a renter, your rent would definitely go
up.
* If you itemize deductions, you can deduct the
interest you pay on your mortgage.
* You leverage your investment by buying the home
with (mostly) the bank's money. You might put only
10% down, but your whole house (all 100%) of it
appreciates every year. If you put $10k down on a
$100k house, the whole $100k appreciates, not just
the $10k you put down.
* When (if) you sell your home, you don't have to
pay any income tax on the gain. Whoa!
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A side note about the unfairness of tax breaks:
Many first-time home buyers are excited to discover that
they can deduct mortgage interest from their taxes. While
this benefit is very real, it's worth noting that this tax
"break" is in fact a scheme which benefits the rich far more
than the middle-class or the poor. There are two main
reasons:
- Poor people who have to pay rent don't get this
break. They can't deduct their rent on their tax
returns.
- Rich people have much more expensive homes, so their
tax savings on mortgage interest is phenomenal. This
deduction actually winds up COSTING middle-class
homeowners, because we're all paying higher standard
tax rates as a result of the rich getting a real estate
deduction that's worth a lot more to them.
Here is a telling passage from Take
the Rich off Welfare:
"The National Housing
Institute calculates that [the mortgage interest]
deduction cost the Treasury slightly more than $58
billion in 1995, and that half that total -- $29
billion -- went to people with incomes over $100,000.
(In comparison, the entire 1995 budget for HUD, the
Department of Housing and Urban Development, was $26
billion.) ... [M]iddle-class homeowners think
they're the ones getting the deal. If you believe
that, you're being had. It's a classic case of being
tossed a few scraps from the table. If we simply
eliminate all the handouts and boondoggles [like this
one], our tax rates would drop so far, so fast, that
special little deals like these homeowners' loopholes
would seem archaic and silly." [pp. 52-56; emphasis
added]
Same deal with the fact that you pay no tax on the gain
when you sell your home. Rich people have much more
expensive homes, so they're the ones reaping the lion's
share of the no-tax-on-the-sale rule. (Actually, rich people
do have to pay taxes on gains above $250,000, or $500,000
for married couples, but that's still a LOT of gain that
they get tax-free.)
Last update: October
2009
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