Rent vs Buy Break-even Point: Everyone is Throwing Some Money Away.

For today we spent some time looking at break-even rent vs buy calculators.  The old adage is that renting is just throwing money away, but there is a bit of tossing dollars into the old bin when it comes to buying as well.  These calculators give one a sense as to when the outflow of our two options becomes equal.

https://smartasset.com/mortgage/rent-vs-buy#mveckFF4yc

When talking about housing, rules of thumb are difficult to utilize due to the sheer number of moving parts.  While this calculator doesn’t take everything into account, it appears to be a nice educational tool.  The inputs that are listed below can have some drastic impacts to the overall calculations.

Influence of various inputs

• Location: The interest on the loan is being assumed based on current location and loan options. Be wary of loans with comparable rates and different APR.APR takes into account any additional fees included with the mortgage (points, \
• Monthly Rent:What are your standards of living for a rental vs owned property
• Target Home Price: What can you afford based on income?
• Down-Payment: 20% gets around having to pay PMI, although only 3% may be required for an FHA loan
• Income:  Tax savings ( more income means more taxes and more savings from tax benefits; remember that tax breaks on property have little benefit to low income owners and the benefits increase as income increases; this is also relevant with regard to homestead exemptions since many of these exemptions have a lower home value that they apply to)
• HOA Fees: Like rent, this is money that more or less just disappears.  It can have a fairly significant influence over your monthly payments and can reduce the target home price that you can afford.
• Annual Maintenance Fees: Consider replacing a roof ($6-15k depending on extent of repair/replacement) every 20-60 years and an air conditioner ($3-8k depending on size and efficiency) every 15-20 years
• Annual Home Value Increase:  This is where the local factor comes in.  Different locations, even within a single city, can have massive differences in this number.  Historical data should be used for reference.  One can never truly predict what this number will actually be in the future.  Since this is being applied to the home value (a large number), a small change in the percentage can have a large change in the total number.
• Annual Rent Increase:  Historical data for your local area is worth researching for this field.
• Annual Rate of Return on Savings:  There is a large amount of money that one drops when first purchasing a house.  Down-payment, closing costs, and mortgage fees.  For buying, the calculator has a section called “lost interest income”.  That lump sum of money would gain value at this rate of return.

The tail end of the calculator expresses some ideas about what you might call the philosophical end of these sorts of decisions. Ultimately, there is a lot more than can and should be said on this topic. Of course, it can seem more than daunting, especially when people tell you it is the biggest financial decision you will make in your life. That said, it is helpful to start thinking about what works for you in terms of economics but also in terms of what you value. That could be an economic decision, but it could also be one about region or living situation or the ability to pack up and leave for a new city.  If you have the financial capacity to do so, there may also be a quality of life factor if you want your own place that you can modify and adapt to your own personal preferences in ways that you may not be able to modify a place that you rent; also provides a level of stability since you are not dependent on someone else to allow you to live in the same place on a yearly basis. You are basically asking yourself to project the trajectory of your life, and you have to realize that you simply cannot accurately predict what will happen or even what you will want to happen down the road. As long as you are attempting to make sound financial decisions, you can at least comfort yourself in the idea that there’s actual real live reasons behind your decisions.