ArticlesBase.com - Free Articles Directory
Free Online Articles Directory
11.10.2008 Sign In Register Hello Guest
Email:
Password:
Remember Me 
forgot your password?


Beware the Rent Versus Buy Calculator

Author: Steve Gillman Author Ranking Gold | Posted: 03-09-2007 | Views: 43 | Rating:  (52) Article Popularity - Blue (?) Got a Question? Ask.
Sign Up Now!

You probably have seen a rent-versus-buy calculator here and there online, and you may have even used one. They are supposed to help you decide if buying a house makes financial sense for you, but do they really tell you what you need to know? Let's take a look at how they work, and how they sometimes don't.

To Rent Versus Buy

The idea of these calculators is to take into account all the costs of both renting and buying over a given time, to compare them and see which option is better. There are a number of criteria involved, though, and this means there will always be some guessing. How many years will you be in the home? How much will rent be up to in ten years? How high will your property taxes be? These fields will be filled in by default in most calculators, and you'll change them as needed.

I just went to the U.S. Government's site, ginniemae.gov to see their rent-versus-buy calculator. Their fields start (mid 2007) with an assumption of ten years in a house, a 7.5% interest rate, and 2% annual appreciation - all very conservative guesses. Here is what all of the criteria were preset at:

Your Current Monthly Rent: $750
The Price of Home: $150,000
The Down Payment: $15,000 (10%)
Term Of Loan (years): 30
Interest Rate On Loan: 7.5%
Estimated Years In The Home: 10
Annual Property Tax Rate: 1%
Annual Home Value Increase: 2%

You can change any of these. For example, property taxes are closer to 2% of property value in some areas. Over 10 years appreciation will probably be more than 2% annually (although it could well be a negative number this year and next). Hitting the "calculate" button, this is what was shown:

Home Value In Ten Years: $182,849
Loan Balance After 10 Years: $117,340
Your Equity: $65,509
Tax Savings (at 28%): $32,549
The Average Monthly Payment Over Time: Rent: $834 - Buy: $550
Total Payments Over Ten Years: Rent: $100,080 - Buy: $66,017
Your Total Savings On: Buying - $34,063

Confusing. My amortization table shows that the payment on a 30-year, 7.5% loan would be $944 per month, not $550 - and this doesn't include mortgage insurance, property taxes or home owner's insurance. They may take into account the tax savings, but that still doesn't explain how they arrive at $550. There is this little note at the bottom:

"The above rent-versus-buy calculator uses the following in its calculations: homeowner's insurance, loan costs, mortgage insurance, cost to sell the home, property tax, homeowner's tax savings, and increases in rent. Results are estimates. "

Well, that certainly doesn't clear things up, but it does point out some other issues, like the fact that there is no calculation at all for repair costs. Having owned several homes, I can tell you that there will be repairs and maintenance. We also don't know if rising property taxes were taken into account. Also if you are in the 15% tax bracket (likely if you're renting a $750 apartment), the tax savings would be about $15,000 less than calculated - a little bit of difference.

Now, even at a more reasonable 6.5% interest rate, the monthly cost of owning a $150,000 home (with taxes, insurance, and minor repairs) is a minimum $1,150 - and probably higher than that. Using the above example, this is $400 more per month than renting. My guess is they take into account the "opportunity cost" of not having that $400 per month to invest over 10 years. That might even surpass the equity gain from owning.

Buying is often a good idea, especially since you probably won't invest that $400 monthly in extra cash flow you get from renting. But do some of your own thinking, understand what criteria are being used, and be skeptical of these rent-versus-buy calculators.

Rate this Article: Current: 0 / 5 stars - 0 vote(s).

Article Source: http://www.articlesbase.com/real-estate-articles/beware-the-rent-versus-buy-calculator-208003.html

Print this Article Print article   Email to a Friend Send to friend   Publish this Article on your Website Publish this Article   Send Author Feedback Author feedback  
About the Author:

Copyright Steve Gillman. To see a photo of the home we bought for $17,500, get a free ebook on how to buy Cheap Houses, and a free real estate investing course, visit: http://www.HousesUnderFiftyThousand.com

Submitting articles has become one of the most popular means of generating quality backlinks and targeted traffic to your website. Join us today - It's Free!

Related Articles

Commercial Real Estate Presents Big Profit
By: Dave Jarvis | 23/05/2007 | Real Estate

Nri Interest Sets Kochi Real Estate on Fire
By: George Gonigal | 24/10/2007 | Real Estate

Personal Finance Choice: Rent Vs Buy
By: Scott Van Zee | 30/10/2007 | Finance
Free Finance articles for use on your Finance related website. Find articles of the subject of Finance

Updates on Noida Real Estate
By: George Gonigal | 14/11/2007 | Real Estate

10 Reasons to Rent Before you Buy a Home in France
By: Steve189 | 26/01/2008 | Vacation Rentals

Buying & Selling on Real Estate Virtually
By: Madhurimasil | 26/09/2007 | Online Business
Online Business related articles, learn how to start your very own Online Business from these great articles published here for free.

Micro Markets to Drive Bangalore Real Estate
By: George Gonigal | 01/11/2007 | Real Estate

Mumbai Properties-lbs Marg Shines
By: George Gonigal | 15/11/2007 | Real Estate

Got a Question? Ask.

Ask the community a question about this article:

Frequently Asked Questions

I rent a house in niagara falls new york, there is ...
By: Mel | 24-09-2008
I rent a house in niagara falls new york, there is no lease agreement. How much can they raise my rent legally. And how much notice am i entitled to?

Need my own space
By: millie | 24-09-2008
Iam 65 on ss only get 655 a month living with my son want to move can only afford to pay 150 a month back for a loan of 1700 can any one help millieohanlon@yahoo.com

Mother of 3, Seeking Assistance wiht Rent
By: Help me Please in College Park, GA | 23-09-2008
I live in Collge Park, GA and I am a single mother of 3. My family resides in Chicago but for the most part I am unale to look for help from anyone. I lost my job in August due to the business closing down and now since I haven't been able to find any work, I was trying to find out if there was anyone who could assist me.

What questions do you usually ask to your ...
By: Adier | 23-09-2008
What questions do you usually ask to your potential new roommate?

Can he legally do that?
By: calicorebel | 22-09-2008
My landlord wants us to pay him for Half of the amount of putting in New Natural gas heating. That includes the boiler, water heater, and piping. We are currently using Oil, that I pay for when we need it. We will not get that amount back. Is he leagaly allowed to do that?

If I file BK, can they take the deposits/rent/security I have paid to my landlord???
By: spope83650 | 21-09-2008
I own a home in Phoenix, AZ that is shceduled for foreclosure 09/22/08 (if we cannot get another extension) Currently, we have been in a "short-sale" situation with the bank. (45 days). We received 3 offers on the house so we thought something would be worked out with our lender, but it was not. We have rented another home that we are currently living in. If we are foreclosed on, we may file bankruptcy. What will happen to the rent deposit, rent itself, security, etc??? As we do not want the landlord to be screwed over...we want to stay here, keep current on rent, etc..... PLEASE HELP.

Q&A Powered by:
Powered by Yedda 

Latest Real Estate Articles

Investment in Dubai
By: Editor-123 | 11/10/2008
Now, even the foreigners can easily invest and can take active participation in the capital investment in this ever-growing market of the Dubai properties. Amidst the glasslike towers along the vast sea, Dubai promises increasing returns for its investors.

Profit From the Foreclosure Boom Through Powerful Foreclosure Training
By: DCFawcett | 11/10/2008
When real estate investors evaluate their options for what types of properties to invest in, some of the first things that come to mind are preforeclosure, real estate short sales, and other types of foreclosure properties. This tendency is a natural one. After all, sellers facing foreclosures are naturally going to be more motivated and that is what most investors are looking for.

Historical City of Apulia
By: Priya Singh | 11/10/2008
Apulia is "mare e terra", sea and land, a world of rich contrasts. The varied coastline and the hinterland with its cultivated farmland; the tranquil small towns and its cultural treasures.

Hawaii Homes and Volcanoes for Sale
By: Hedin Johan | 11/10/2008
Volcanoes can be found it most parts of the world and Hawaii is no exception-the beauty and lush landscape that comes with volcanoes is literally out of this world. When I suggested a few friends of mine to go visit the islands, I didn’t realize they’d come back with more than they’d bargained for.

Find Hawaii Homes for Closure and Profit
By: Hedin Johan | 11/10/2008
When we talk about the homes that are up for foreclosure, it really does seem like these homes and their families are closing down for good.

Find Great Investments From a Professional Real Estate Company in Hawaii
By: Hedin Johan | 11/10/2008
Real estate in Hawaii is what dreams are made of. Some would love to live there, some would just simply invest there but for others, it’s a place to die for.

Tips to be a Property Buyer
By: Editor-123 | 11/10/2008
Are you planning to buy a retail property? You can own your dream property by following some simple steps. Don’t worry about the long period for the planning and preparation. Usually it may take many months or even a few years. Don’t worry or get discouraged. The time taken is worthy of pursuing your goals.

Using an Agency to List Your Orem Real Estate
By: Art Gib | 10/10/2008
When people decide to sell their home, they often turn to an agency or a brokerage for help.

More from Steve Gillman

A Simple Meditation for Beginners
By: Steve Gillman | 10/10/2008 | Stress Management
If you are intimidated by all the different ways to meditate, here is a simple meditation for beginners.

A Recipe for Political Changes
By: Steve Gillman | 07/10/2008 | Politics
Are you looking for political changes that just don't seem likely with the existing candidates? There may be a better way.

In Case You Didn't Know
By: Steve Gillman | 06/10/2008 | Economics
There are a lot of little secrets in everyday life. Here are six of them, in case you didn't know.

Four Good Luck Tips
By: Steve Gillman | 06/10/2008 | Motivational
Would you like more good luck in your life? Start with these four tips.

Choosing the Best Meditation Music
By: Steve Gillman | 01/10/2008 | Stress Management
Looking for the best meditation music? Start with these guidelines.

Good Metaphors - What They Do for Us
By: Steve Gillman | 30/09/2008 | Advice
A look at what good metaphors consist of and how they are useful.

Unclaimed Property - a Government Scam?
By: Steve Gillman | 29/09/2008 | Economics
Unclaimed property is turned over to state governments, but what do they do with it?

Save Money on Groceries - Six Tips
By: Steve Gillman | 27/09/2008 | Personal Finance
Some valuable tips on how to save money on groceries - and not just the usual ways.

Article Categories






Give Feedback

Sign up for our email newsletter

Receive updates, enter your email below