There is an important oversimplification that these formulas/programs/spreadsheets often make, and I see it happening here. Consider two alternatives where everything is the same except the amount of money used for the mortgage down payment. The formula assume that money not used for the down payment is invested at a certain rate of return. If the mortgage interest rate is greater than the investment return, then the formula always indicate that the largest down payment possible should be made and if the rate of return for investments is assumed to be greater than the mortgage interest rate then the smallest possible down payment should be made.<p>Its easiest to understand the problem with specific numbers. Assume a home buyer has $120,000 that could be put into a down payment, but that the minimum required is only $20,000. What should the buyer do? Assume that the investment rate of return is 5% and the mortgage rate is 4%. Investing the $100,000 instead of using it for the down payment is essentially borrowing $100,000 at 4% and investing it at 5%. All the formulas/worksheets/programs like this one and even professional investment advisors will end up showing that is better to put down the minimum down payment and investing the $100,000. This ignores the risk between alternatives. Putting the $100,000 into the down payment produces a guaranteed, riskless, return the buyer of 4% per year (by saving him or her the mortgage interest payments on the $100,000). The 5% potential return from investing the money isn't a fair comparison. The comparison needs to be made to a riskless investment (e.g. US Treasury Bills). Currently the riskless rate of return available to investors is approximately 0%. This means that in the current environment the correct alternative is to put the $100,000 extra into the down payment (absent any liquidity concerns).<p>One may say that they are willing to take some risks to obtain a higher rate of return. Modern Portfolio Theory has its detractors, but as far as home buyers are concerned, its implications are still apropos. Having one component of your overall portfolio earning the equivalent of a riskless 4% (by making the larger mortgage down payment) is likely to produce better aggregate returns (on the home and additional equities etc.) at whatever risk tolerance one designs for their overall finances.<p>I have no formal training in finance or investing so none of what I've described here should be interpreted as advice, instead it is intended to spur discussion.
We rented for the first ten years of our married life, and then purchased. All of the financial arguments aside, don't discount the value of having a place with your name on the deed. We had been forced to move out of two previous townhouses when the leases expired and the owners decided to sell. Knowing that your place is your place (yes, the bank's really, but they can't easily take it from you) is maybe an undervalued benefit.
Does this take into account the risk of a housing market crash? For me, the biggest reason for renting rather than buying is to avoid putting all my bags in one basket; I wouldn't buy $500k worth of shares of one company, so spending $500k on a single house seems similarly risky.
It's good to get people thinking about all the things included in the calculator. Most people are totally clueless when it comes to the real cost/value of owning. They only see what someone bought a property for and what it sold for some time later.<p>A home you live in is almost always a net cost. It's not really an investment so much as its a cost avoidance (vs renting). Buying more house than you need "because this is an investment" is almost always a bad idea if you live in the home and thus are the one footing the bigger tax bill, interest, maintenance, utilities, improvements...
The money is certainly important.
But buying is better than renting in many ways.
Want to rip out your kitchen and have a new one?
Want to pave part of the garden?
Want to move a wall?
Want to paint it all, or fit blinds?<p>If you own it you can do all that. If you rent you have to ask permission which you might not get. Plus why spend money on somewhere you don't own?
One thing to consider -- avoid the 30-year fixed mortgage if you can. If you are buying, then buy a cheaper property that you can pay off in 5 years or so. Then in 5 years, you can sell that and take out another loan for the next property. Example: I bought my house for 180,000 on a 30-year mortgage, and 20% down payment (36,000). 15 years into it I've barely made a dent. I would have been better off buying a $100,000 smaller house or town house/condo, and I could have paid that off in 5 years with what I'm currently putting out per month (counting lower taxes and insurance on the smaller property). Then I could have sold it, and bought a $160,000 house, and 5 years or so later owned that one outright.<p>This is also a market proof strategy -- if the market goes down, the your current house may lose value (but you're not upside down on your mortgage, because you don't have one after 5 years). But the next house will also be proportionally cheaper too. And if the market goes up, the house you just paid off has gained in value, making for a bigger down payment on the next house.
One factor that's never discussed is the availability of rental inventory. In some cities it's very hard to find a single family home (instead of an apartment) for rent - hence buying becomes the only path to getting the type of home you want.
I've always wanted a model like this to point people to. I don't have a dog in the buy/rent column, but I feel like most of these decisions are made without a regard for many pertinent considerations. The main one that bugs me is how long you will likely stay in a place. Completely disregarding market effects, if you're not going to hold onto it long then it's probably not going to work out.
Some people don't buy to, in their words, avoid being exposed to the property market or some variation thereof. This a fallacy. As long as you need somewhere to live you are exposed to the property market.<p>A good way of looking at this is: not owning is equivalent to having a large short position in the property market. If prices go down, you "win" by not losing money and/or your rent going down. If prices go up, you "lose" because your rent goes up and what you can buy now is less than what you could've before.<p>That's a fine position to take but my point is that it IS a position.<p>You don't necessarily need to own where you live but you should own _something_. It could be in the area you plan to retire to (to hedge against rising prices), an investment property to generate income or whatever.<p>IMHO REITs aren't the answer here. Residential and commercial real estate are different beasts. Commercial real estate is generally a means of generating income. Residential is far more speculative.<p>Some people compare long term returns on property vs equities. These compare reasonably favourably.<p>In all those cases borrowing to buy property is far more favourable. In the US at least you can get 30 year fixed mortgages that are currently hovering about 4% for 80%+ of the purchase price. You just can't get those terms on anything else.<p>Even on day 1 your mortgage payment is ~30% principal at these interest rates.<p>Property tends to be a great hedge against inflation too and higher interest rates and higher inflation seems to be a risk with the amount of quantitative easing occurring in the developed world.<p>Lastly, the ability to essentially fix your housing costs is (IMHO) huge, particularly in major urban centers.
It totally depends on the area and timing. I've bought and sold a number of places for a decent profit (all in cities) AND I managed to hold onto my last one and rent it for a good deal more than the mortgage payment. Renting IS throwing money away, plus none of my friends who rent live in as nice of a place as I do for the same monthly payment. Sure they can move to another city faster than I can, but the longest I've taken to sell a place it 4 months, not a big deal.
It heavily depends on the area. In very urban areas, property is a lot more expensive, and renting is probably the way to go. In my area, it's almost the same cost to buy as to rent. The difference being, you can get some of the money back on your purchase by selling your property, whereas your rent just entered a black hole.
So I pretended that "$" meant "£", and entered some plausible UK figures, including recent house price growth of 8% and rental growth of 10%, and it told me I should buy unless I could rent for -£391 a month.<p>Taking out a mortgage is clearly the best investment I ever made.
Any github link to the actual visualisation would be handy .. looks like crossfilter types <a href="http://square.github.io/crossfilter/" rel="nofollow">http://square.github.io/crossfilter/</a>
I think this has been mentioned a couple of times when it has come up, but it would be nice to be able to add / remove local taxes e.g stamp duty here in the UK.