The Insurance Locator

You've probably seen a rent versus buy calculator here and there online, and may have even used one. Is supposed to help you decide if buying a home makes financial sense for you, but what really tell you what you need to know? Let's look at how they work, and how sometimes not.

Rent or buy

The idea of these calculators is to take into account the cost of renting and buying both at some point, to compare and see what option is better. There are a number of criteria in question, however, and this means that there is always some guesswork. How many years will be in the house? How much rent will be up to ten years? How high are your property taxes? These fields must be filled in by default in most calculators, and change as needed.

I just went to the site of the U.S. Government, ginniemae.gov to see the car-versus-buy calculator. Their home fields 2007 (MID) with a assumption of ten years in a house, a 7.5% interest and 2% annual appreciation – all very conservative assumptions. This is what all criteria were defaults:

His current Monthly Rent: $ 750
House Price: $ 150,000
The initial payment: $ 15,000 (10%)
Term Loan (years): 30
Interest rates on loans: 7.5%
Estimated Years in Home: 10
Annual Property Tax Rate: 1%
Annual Increasing Home Value: 2%

You can change any of these. For example, property taxes are closer to 2% of property value in some areas. More recognition of 10 years is likely to more than 2% a year (although it could be a negative number this year and next). Hit the "Update" button, this is what is shown:

Home Value in ten years: $ 182,849
Loan balance after 10 years: $ 117,340
Its capital: $ 65,509
Taxation of savings (28%): $ 32,549
The average monthly payment over time: Rent: $ 834 – Purchase: $ 550
Overall payments over ten years: Rent: $ 100,080 – Sell: $ 66,017
Your total savings: Buy – $ 34,063

Confused. My amortization table shows that payment of a 30-year, 7.5% of the loan would be $ 944 per month, not $ 550 – and this does not include mortgage insurance, property taxes or insurance of the house owner. It may take into account the tax savings, but that still does not explain how they came to $ 550. There is this little footnote:

"The by hire-purchase up compared with the calculator uses the following in its calculations: homeowner's insurance, loan costs, mortgage insurance, the cost to sell the house, the property tax, the tax savings the owner, and rent increases. The results are estimates. "

Well, certainly that things can not be cured, but noted some other issues like the fact that there is no calculation in all repair costs. Having owned several homes, I can say there will be repairs and maintenance. Nor do I know if the increase in property taxes have been taken into account. Also if you are in the support of 15% tax (likely if you are renting an apartment for $ 750), the tax savings would be about $ 15,000 less than estimated – a bit of difference.

Now, even at a more reasonable 6.5% interest rate, the monthly cost of owning a home of $ 150,000 (with tax, insurance and repairs) is a minimum of $ 1,150 – and probably more than that. Using the previous example, this is $ 400 more per month for rent. My guess is that they take into account the "opportunity cost" of not having that $ 400 per month to invest more than 10 years. That might even surpass the capital gain possession.

Shopping is often a good idea, especially they probably will not invest that $ 400 a month in extra cash flow you receive from rent. But making something of their own thinking, understand what criteria are using, and be skeptical of these rent versus buy calculators.

About the Author:

Copyright Steve Gillman. To see a photo of the home we bought for $17,500, get a free ebook on how to buy Cheap Houses, and a free real estate investing course, visit: http://www.HousesUnderFiftyThousand.com

Article Source: ArticlesBase.com – Beware the Rent Versus Buy Calculator