If you plan to stay in your home past your , then buying makes financial sense. If you think you’ll move earlier, then renting may be the way to go.
The Return on Investment listed is just that -- the 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.
With certain sets of assumptions, we see the curious case in which renting is better at first (pink), then buying becomes better (green), then renting becomes better again (pink).* There's no real mystery here, it's just that it takes time for some variables to catch up to other variables. If you start walking to Chicago, and then an hour later someone else starts on a bicycle from the same point, eventually they're going to pass you, but it'll take a while. Likewise, if two hours later someone starts from the same point on a motorcycle, then eventually they'll pass the bicyclist.
Down payment: It’s the lump sum you’ll pay upfront that funds equity in the property and proves to lenders that you’ve got skin in this homeowner game. Down payments vary. In the go-go days that led up to the housing collapse, some lenders dismissed the down payment altogether – and we see how well that ended. Today, and often gets you the best rates, but some loans allow . Sometimes parents or friends can offer . If you have a choice, take a gift rather than a loan, not only for obvious reasons, but because lenders will add that debt to other monthly obligations and potential mortgage payments to determine your debt-to-income ratio, which generally can’t top 43 percent to qualify for a home loan.
This kind of investment contrasts with investing the cash saved by renting as a renter, where you'd to sell your investment in order to cash in on it, and thus would have to pay taxes, and no part of it would be excluded. 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, as explained above. 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. And if you do owe any taxes on a sale, it will be only on the small portion of the gain that's above the exclusion amount, and even then the long-term capital gains tax rate is usually only 15%.
Any calculator is only as good as the assumptions. Probably the biggest assumption in this calculator is the . 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.
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 when 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 usually overcome the extra money you had to pay to get into the home. That's what this calculator tells you.
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 do. Only you can make that decision.
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.
Remember, any calculator is only as good as the assumptions. If you put bad data in, you'll get bad data out. One of the biggest factors in whether it's better to buy or rent is the appreciation rate: A small change in the appreciation rate means a big difference in the bottom line. Unfortunately you (and I) can't predict future appreciation rates, so the answer we get from any calculator doesn't come with any degree of certainty about what's actually going to happen. Still, it's worth knowing whether buying looks much better or much worse than renting, given reasonable assumptions.
Closing Costs on sale. When you sell your home, you generally have to pay a 6% commission on the sale, and some other closing costs which we estimate to be around another 0.5% of the sale price. Even if you don't plan on selling, you have to know that your home is really worth about ~6.5% less than it's worth on paper, so we can compare its true value to the cost of renting. As with everything else in the calculator, you can change the commission percentage figure if you like. The Closing Costs figure is shown on its own line in the Results Summary, though in the Mega Data Table it's built into the House Value (net) figures (whose values have been reduced to account for the closing costs). Above is a table of common seller's closing costs. See more about seller's closing costs at .
When I heard about the website for the first time from a student who studies at the same college as me, I was surprised that renting books through the internet is even possible, because I did not realize before, that this kind of service is provided for people online....