Though a legitimate calculation, the rent vs. buy decision isn’t fundamentally based on comparing the current rent on a property to the initial monthly cost of owning it: More meaningfully, the financial decision pertains to total cost over time and, especially, how to best build household wealth. As will be reviewed, there are multiple dynamics at play, but long-term, fixed-rate loans + the ability to refinance, and, in particular, home-price appreciation have historically been the biggest game-changers in the calculation.
Perhaps more than any other decision, buying a home combines deeply personal, quality of life and life-planning issues and substantial financial considerations—which only you can weigh according to your own circumstances, plans and priorities, and your projection of what the future holds.
Comparing the exact financials of renting vs. buying over time is challenging, because the calculation depends on predicting a number of complex, often volatile economic factors, including:
- rental-cost appreciation over the period of projected home ownership;
- the return one could generate on one’s down payment monies if invested instead;
- of being used to buy a home;
- total home price appreciation over the period of ownership;
- inflation over the period;
- mortgage interest rates, at purchase and in the future.
There are a number of rent vs. buy calculators available - a few are listed below. But any calculation is predicated on taking a stab at what's going to happen in the future with factors that, as we have seen in recent years, can change quickly and dramatically.
Certainly reviewing current economic and market conditions, and looking a past trends is useful – for example, annual real estate appreciation rates over the past 10 or 20 years – but even then, the calculations will depend on the exact period used to calculate past performance, and, of course, the future may not replicate the past. Consulting qualified financial, mortgage and real estate advisors is always a good idea.
The default economic assumptions built into the sample rent vs. buy calculators below are open to debate, but can be adjusted as one runs different scenarios. (Small changes in assumptions can lead to substantially different results.) Following the calculator links is an exploration of some of the financial issues pertinent to the homebuying decision.