FAQ + Methodology
Assumptions and limits of using the HomeCostCompare calculator.
Understanding the Buy vs. Rent Calculator
This calculator focuses on comparing the relative financial outcomes of buying versus renting, rather than predicting exact costs for either option (e.g., it only factors differences in utilities if they exist, and ignores other smaller expenses, etc., because the assumption is that both owning and renting will bear similar expenses for comparable homes). The goal is to help you understand which choice might be more financially advantageous given your specific circumstances and assumptions about the future.
The calculator uses the buying option as the baseline for what can be invested in the market for the renting option. If buying is more expensive, it assumes you can afford that option. If it is less expensive, renting may result in negative investment values.
Keep in mind that most people move out of their home before the end of their mortgage; it could be due to a growing family, new job, change in finances, need to be closer to parents, etc. So, it's important to look at what happens over time (the charts show relative positions over time if you moved): the shorter your stay, the greater the impact of closing costs and broker fees.
Moving Statistics
Most homeowners don't stay in their homes for the full mortgage term. The graph below shows the cumulative percentage of homeowners who move by year:
Source: Data approximated from National Association of Realtors and U.S. Census Bureau statistics
Key Assumptions
Investment Returns: The calculator assumes that savings from renting (including down payment equivalent and monthly expense differences) are invested at the specified market return rate. If renting is more expensive during a month, then the difference is withdrawn from the investment accounts. If the investment value is negative, that means that the renter has incurred a financial opportunity cost compared to the owner. If there is a rental broker fee, that amount is deducted in the initial investment calculation.
Property Appreciation: Home values are assumed to increase at a constant annual rate, with the appreciation calculated monthly.
Property Taxes and Maintenance: These are calculated as a % of the home value at the start of the year. I.e., the calculation is based on a once a year home appreciation schedule.
Rent Increases: Rent is assumed to increase annually at the specified rate. If there is a difference in utilities (for example, they are included in the rent so you add a utility discount, that difference also increases at the same rent increase rate).
Tax Breaks: If you select US residency (default), then the buyer scenario may benefit from mortgage interest tax deductions and property tax deductions (subject to SALT limits) if these add up to be greater than a standard deduction. The marginal tax rate and marital status you enter will impact this potential annual benefit.
Capital Gains Taxes on Home Sale: For the US, capital gains in primary homes can be tax free up to a certain limit. Home appreciation beyond that limit is taxed at the long-term rate. Non-US jurisdictions can have no tax, or higher tax on home so please consider this when inputing the Capital Gains Tax Rate.
Capital Gains Taxes on Investments: The default assumes that a renter, when moving, will continue renting and so doesn't need to withdraw investments from the market: so, unrealized gains can continue to compound pre-tax. If you want to see the impact of capital gains taxes because you will use all the profits to buy a home or for some other large expense, you can configure this in the advanced options.
Rental Broker Fee: If applicable, you can add a one-time rental broker fee. This fee reduces the renter's investment value, as it represents an upfront cost that reduces what could otherwise be invested.
Utilities Difference: Utilities should be the same for comparable homes. But, if there is a consistent monthly difference in utility costs between comparable owned and rented properties, you can factor this into the calculation. A positive value indicates higher costs for the renter, and a negative value indicates lower costs for the renter. If utilities are included in the rent, then you can input a negative value to represent the utility discount for the renter. The utility difference will change over time at the same rate as rent growth rate. The utility difference is lumped in with monthly rent in the results.
Mortgage Rates: We pull mortgage rate data from the Fed to help you based on market conditions, but you can change them based on your situation.
What's Not Included
Insurance: Homeowner's insurance cost can be added by increasing the value of the 'maintenance + other' box (typically 0.5%-1% of home value). Renter's insurance is ignored in the model because it's typically minimal compared to homeowner's insurance and other costs, and it shouldn't significantly impact the relative comparison given variability in the exact homeowner insurance rate.
Inflation Adjustment and Net Present Value: Results are in nominal terms (not inflation-adjusted) because the focus is on real cash flow difference between renting and owning: actual money difference that you'd see in your bank account rather than theoretical 'purchasing power' difference. Your inputs on home appreciation, rent increase, and investment returns already account for expected future costs.
How to Use the Results
How Long Will You Stay: Consider short-term (1-5 years), mid-term (10-15 years) and long-term (30-year) scenarios, as most people move before their mortgage ends. However, if you plan on living in that home beyond the mortgage, then monthly payments for owning will step down once beyond the calculator's range while rents likely continue to increase.
Shifting Advantages: Pay attention to crossover points where the advantage shifts between buying and renting.
Rate Assumptions Change Everything: Test different assumptions about appreciation, investment returns, and rent increases to understand sensitivity. High mortgage rates and assumed market return rates have dramatic impacts on outcomes.
The Intangibles: Remember that financial comparisons are just one factor in the rent vs. buy decision. Significant intangible benefits exist on both sides (e.g. being able to paint walls or make home improvements or differences in school districts, or having flexibility to move easily, etc.).
Limits: This calculator is for informational and educational purposes only and is not intended to constitute financial advice. There may be errors.
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