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Calculating the Cost

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Posted On: 10/05/2016

Question: We have found a number of rent-versus-buy calculators online, but even using the same information regarding down payments and rental rates they all give different results. The differences are important to us. Which calculator should we use?

Answer: To make a rent-versus-buy calculator there have to be certain assumptions. For instance: How much will rent go up? How much will the value of real estate increase? How much interest can you get for savings or certificates of deposit? What mortgage rate is being used? How long will you own?

The assumptions used by rent-versus-buy calculators may well be logically grounded with an eye toward past events. The catch is that what happened in the past does not necessarily open a window to the future. How many people in the year 2000 thought that real estate values would rise markedly during the next few years? How many people in 2006 – a time of strongly-rising real estate values – predicted that home prices would suddenly go flat in the next few years or that millions of people would shortly lose their homes to foreclosure?

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Since we don’t know what the future will bring there’s no way to know with certainty whether renting or buying is the better option regardless of what calculator we use.

That said – let’s consider a few issues:

First, you generally do not want to be a short-term owner. The reason is that it costs money to buy a home and money to sell. To “break even” you want to sell for more than you paid, something that is difficult to achieve in the short run.

In a quickly rising market, it could be argued that short-term ownership is acceptable, but we don’t know whether today’s price trends will continue. For example, in the second quarter of 2016, the National Association of Realtors reported that existing home values rose in 148 of the 178 metro areas it measured. No less important, while values may be generally rising in a local community we cannot be certain that all values will rise. (The opposite is also true: if home prices in a local area are generally going down it does not mean all homes are losing value.)

Second, you do not want to buy if you have an iffy job situation. Ownership implies the ability to make mortgage payments month after month until the debt is repaid. Alternatively, if you feel good about your job situation then you will want to consider ownership.

Third, the value of the mortgage interest deduction is less important than it used to be because mortgage rates are near historic lows and as a country we have less mortgage debt than in the past. For certain borrowers it may now be better to use the standard deduction rather than itemize.

Whether to buy or sell depends on such measures as your economics, real estate trends in your local area, mortgage rates and especially personal preferences. So yes, while real estate ownership can be highly desirable, the level of desirability for every individual is different – and different in a way that can’t be fully captured with numbers or a rent-versus-buy calculator.

Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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