Deciding between renting or buying is an important financial calculation because if you rent when you should buy, you end up pouring money down the drain, because you’re not building up any equity. However, if you buy when you should rent, you can end up paying too much in up-front mortgage fees to make sense — or you end up with a mortgage payment so high that you end up being “house poor” — so burdened by your monthly payment that you don’t have enough money in your budget to have any real quality of life.
There are some general principles to remember as you make your decision, of course. Because of the expenses associated with buying and selling a house, most people advise you to rent if you don’t plan on living in the place for at least three years. When you start paying a mortgage, the vast majority of your payment goes to interest each month, with the ratio gradually shifting more toward principal each month as you make each payment. In the first few years of a mortgage, you’re building almost no equity because you’re paying mostly interest expense on the note each month.
So while renting is cheaper at the front end, as you generally only have to put down a deposit rather than making a down payment, but often times buying the house becomes cheaper as time goes by, because in many cases the rent that you would pay for a house is more than the mortgage payment would be — after all, many landlords use the rent payment to make the mortgage payment on the property as well as building up some savings for maintenance and some profit.
This is where a rent vs buy home calculator comes in. You enter the purchase price, the likely interest rate for your loan and the amortization period of the loan. You’ll add in things like maintenance fees and condo fees to get a sense of what it will cost you to own the house. You also enter closing costs and your down payment to get a real idea of the cost of buying. Then, you enter the rent that the owner would charge you to lease the house. The calculator tells you how long it will take you to break even financially on the costs. It also tells you how much investment you have in the property over time. Obviously, you won’t have much investment at all as a result of paying rent, but you can see your equity going up over time. All of these factors help you decide whether you should buy the house or rent it.