What is a Rent vs. Buy Calculator
While homeownership presents a great opportunity for many borrowers in the financial position to embark on the peace of mind that comes with housing security and wealth accumulation, interested home buyers will want to weigh their options carefully depending on their unique financial situation.
Fortunately, comparing the costs of renting versus buying can be estimated by inputting a few expense variables with the click of a button via online calculators. You will need to research a few inputs outlined below, which will all be taken into consideration to help you to make more sound and efficient decisions when it comes to buying or renting your home.
The Home Loan Expert is here to break down how home buyers can use a rent vs. buy calculator to their advantage when estimating their monthly payments.
Is Renting a Home Right for Me?
Timing is everything when it comes to purchasing a home. The amount of time you are planning to stay in that home will have a significant impact on whether renting or buying your home makes more sense according to your return on investment and affordability. Both of these factors intersect at a “break-even” point, which can be used to establish a financial plan of action that makes the most sense financially to each individual. The following mental checklist can help you determine if renting a home is the best option for you:
- How long do I plan to stay? Some people already know they do not plan to stay in a house. If your intended length of stay is temporary and you are not yet ready to put down roots, renting gives the option of a trial run with fewer financial commitments. How long you are planning to stay will have a huge impact on your break-even point. The shorter the length of stay, the less sense it makes to buy a home based on the break-even point. Generally, if you are planning to stay somewhere less than 2 years, it is a good indication that renting makes more sense financially. However, if you intend to keep the property as an investment or are in a financial position to flip it soon after renting, buying could put you in a better financial position.
- What is my Financial Bandwidth? Yes, there are certain loan types that allow you to purchase a house with no money down. However, the general rule of 20% down still applies for homeowners who wish to avoid higher rates and additional costs like private mortgage insurance (PMI). Apart from the principal and interest paid on a loan, monthly payments can include other expenses like HOA fees, homeowner’s insurance, property taxes, and other maintenance fees that your monthly budget will need to be able to comfortably accommodate.
- What is my Personal Financial Standing? Your credit score, Debt-to-Income (DTI) ratio, and other financial records will impact your ability to qualify for better rates and terms on a loan. Your financial records matter because they will indicate to your lender the likelihood that you will be able to repay your loan, which ultimately influences your chances when seeking an initial approval on a loan.
- Am I missing an opportunity to build wealth? For many homeowners, built-in housing equity is one of their greatest assets when it comes to building wealth. When renting a house, there is no return on investment from making your monthly payments.
- How do upfront rental costs compare to the break-even point? When adding your first and last month’s rent to calculate your security deposit with additional upfront costs, you may want to evaluate how far you are from being able to use that chunk of money as part of a down payment on a home. If you are planning on being in a house long-term, strongly consider if buying or renting your house will put you in a better position financially.
How Do I Determine if Buying a Home is Right for Me?
Assuming you will meet the lending requirements, there are myriad aspects related to home ownership that can be more costly compared to renting your home. Below are some points to take into consideration when deciding if buying your home is the best option for you based on your lifestyle and financial situation.
- Do I plan to stay five years or longer? The longer you plan to stay in your home, the more likely it is that buying your home will put you in a better position financially. This will give homeowners time to build housing equity, which can be used as a source of personal wealth. Home equity can act as leverage for homeowners to achieve debt consolidation, pay college tuition, or do home renovations. Homeowners will also set themselves up to eventually be able to refinance their loan which can put them in a better financial position. Additionally, consistent monthly payments over time will also benefit your financial records, like credit scores. Depending on how much you can comfortably afford each month, keep in mind that most terms come in increments of 15 or 30 years. If you are looking for peace of mind in housing security, you’ll want to contribute to that timeline in a way that is meaningful with tangible results of homeownership on the horizon.
- How much home can I afford? Beyond principal and the interest paid on that principle, those seeking homeownership will want to be aware of how other costs and fees impact their monthly payments. Determining how much you can put down for a down payment, ideally 20% to avoid other costs like PMI and higher rates, is another significant cost to calculate. Other fees and costs to consider may include HOA fees, homeowners insurance, property taxes, other maintenance fees, utilities, appraisal fees, and more. Some of these costs will need to be provided for upfront, while others typically get rolled in the loan and distributed throughout the life of the loan via monthly payments.
- What is my financial commitment threshold? Not only should you be aware of other financial commitments, like student loans or car liens, your lender will also look at these as part of your financial records when deciding on loan approval. Steady income will also affect your ability to make monthly payments and is used to discern your eligibility on a loan application. Using a rent vs. buy calculator is a great tool for potential home buyers to employ when calculating a budget as part of their financial plan of action when determining their financial commitment threshold.
- Is now the best time to buy? The housing market fluctuates. During periods of higher scarcity and inflation, housing prices will rise. Conversely, there are loan programs available with historically and competitively low rates, making home ownership more affordable compared to previous economic quarters. It may be more financially beneficial to rent a home until you can save for a down payment. The best time to buy a home relies on some external factors but is ultimately specific to each individual’s financial location.
- Where do monthly payments fall on the break-even point? As mentioned, terms on loans are typically at intervals of 15 or 30 years. 15-year terms require more aggressive monthly payments but can save home owners thousands of dollars in the long run by paying off the loan more quickly and reducing the interest paid by offering it at a lower rate and shortening the amount of time the interest is paid. 30-year terms may offer more comfortable monthly payments and provide an opportunity to diversify wealth-building goals through other investments. Rates, costs, and fees over the term of the loan will all need to be calculated when looking to establish the break-even point on your home loan when compared to renting for the short-term or long-term.
How Does a Rent vs. Buy Calculator Compare Monthly Payments?
A rent vs. buy calculator will cross-compare monthly payments, costs, and fees that are used to determine the break-even point for homebuyers and tenants. The break-even point is estimated by calculating the following inputs:
- Monthly mortgage payments vs. monthly rental payments. This input compares how much a homeowner would pay each month in monthly payments to how much a tenant would pay their landlord at the end of each month. Location and desired length of stay can affect the gap in the range between a comparison of these two payments, which sometimes is a difference of a few hundred dollars.
- Time. While we may not always be able to envision our future 5, 10, or 20 years from now, time is a fundamentally important variable to calculate when determining if buying or renting your home makes the most sense for you financially. Time will be heavily influential in determining your break-even point. The longer you stay in a place, the more likely it is that buying your home will make more sense financially. For more transient occupants, renting may be the best option.
- Annual income. Your salary and other sources of income play a pivotal role in determining how much house you can afford in addition to loan approval eligibility from your lender. This is because income is used when factoring in the risk on a loan issued by your lender. A steady and reliable source of income coming in will be required to demonstrate the borrower’s capability of loan repayment. Sources such as your salary, a spouse’s salary, or pension/retirement count as income. Partial income and bonuses are applicable only if they are considered reliable and can be predicted to continue for the foreseeable future of paying off the loan amount. To verify your annual income, your lender typically requires two years of W2s and current pay stubs.
- Appraised equity value vs. rent increases. This is all about the return on investment. When renting your home, there is no return on investment made through equity in addition to having to pay increased rental fees. For homeowners, ideally, the assumption is their home will go up in value each year. This is where the break-even point plays a significant role in determining which option makes the most sense according to each individual’s financial location.
- Additional house-related expenses. Apart from your security deposits and utilities, renters may be obligated to pay other expenses like pet fees, or parking fees. Depending on your location, these fees can add up to a small fortune. Homeowners should be mindful of expenses like homeowner’s insurance fees, property taxes, HOA fees, interest, and other expenses that are calculated in addition to the monthly mortgage payment.
Using a rent vs. buy calculator can help you as an individual answer some of those challenging questions when you are deciding if homeownership is the correct path for you. Asking yourself if you require more flexibility or if you are ready to financially commit to regular monthly payments over the life of a loan is no small contemplation. A rent vs. buy calculator can provide you with a visual representation of where your break-even occurs along the intersection of rates and terms over some time compared to monthly rental fees. Input your variables using this rent vs. buy calculator to get started and see which option is best for you.
How Can The Home Loan Expert Help You Determine if Renting or Buying is Right for You?
Anyone interested in becoming a homeowner deserves a lending service provider who is dedicated to getting them the best deal possible on a loan. You deserve the support to make a guided decision about what makes the most sense for you financially and for your lifestyle. The Home Loan Expert has not forgotten its humble roots of going door-to-door, to help homeowners make sure they are taking full advantage of lending opportunities available to them. Our success in spreading our mission nationwide is largely in part to training a dedicated team of friendly lending Experts who come from the same communities we serve.
Our team of lending experts can efficiently and painlessly get you an approval on a home loan, thanks to our ability to streamline the underwriting process in-house. We believe in a customer-centric approach with a personalized experience to come up with a financial plan of action that works with your home ownership goals. A rent vs. buy calculator is a great resource to use when you want to cross-compare your expenses; one of our lending Experts will be able to provide you with more accurate information on which option makes more sense for your unique position. Give us a call at (866)221-1458 to speak with one of our friendly lending experts or reach out to us through our live chat option.