Should You Buy or Rent?

The traditional wisdom has long been that home ownership is one of the routes to riches. "Why should I give give my money away every month to someone else when I could be paying it to myself?" Home ownership means building equity and tax breaks — it's the American dream. Definitely a good idea, right?

Ummm, maybe. Home buying is only a smart economic decision for certain people. This page takes into account many of the different factors involved in purchasing a home and helps you get a better idea of if it is a good idea or not.

If you are interested in the math, more info is available.

Home Costs
- House Cost When you buy a house, the person you are buying it from expects a certain quantity of money. This is the cost of the house.
- Downpayment When you buy a house, you generally have a chunk of cash that you give to the bank to get things rolling. This is the downpayment. In general, with a downpayment of 20% or more, the federal government will provide insurance to the lender if the lendee should default on the loan. With a downpayment of less than 20%, a private company must provide that insurance — PMI. One method of avoiding PMI is to have a downpayment of 10% and to take a home equity loan on the purchased home for an additional 10%. This is called a piggyback loan.
- Closing Costs Fees charges by the bank to provide the mortgage loan. These include the originiation cost, house assessment, attorneys' fees and title search. Typically 3-6% of the loan depending on the state and lender.
- Property Taxes Money provided to the municipality to cover costs of elementary education, public utilities and whatnot.
- Stock Growth Rate Rate at which money invested in a mutual or index fund would increase in value per year. This rate is important in computing the cost of a house because money invested in a house is not invested elsewhere.
- Loans
Home Benefits
- Home Appreciation Rate Rate at which a home is expected to increase in value per year. In general this rate should track about with inflation (~3%). Choosing a home in a neighborhood that is gentrifying or improving the home can cause this rate to exceed inflation. A correction in the housing market, poorly planned renovations or a neighborhood decline can cause this rate to undercut inflation or even become negative.
- Cost to Rent Everyone has to live somewhere. How much would you be spending per month to rent if you don't buy?
- Rental Income If your house has more room than you need, you might rent some of the extra room. How much will you make from that per month?
- Taxable Table
  Interest payments on a mortgage are tax deductible. If you are a grad student making $20k per year it is entierly possible you will pay more in interest than your taxable income.
Monthly Payment

Should You Buy or Rent?

Home Costs

Loans

Home Benefits

Taxable Table