Dream Debt
December 29, 2019
This interactive graphic compares accumulated wealth over time when buying a home versus renting. Buying is usually better in the long run, but how long? That's what this is for.
The Rent line simply shows savings minus rent over time, plus the down payment and closing cost. It should look boring. The Buy line is trickier. It shows savings plus mortgage principal, minus the mortgage interest, property taxes, and insurance over time, plus the down payment, minus the closing cost.
Totally clear, right?
Now, there are some assumptions being made when you update the parameters above. A few things are simplified and not everything is taken into account. This tool assumes your income won't change for the next 40 years, and it doesn't consider income taxes at all. It doesn't adjust property taxes and insurance for population density, only by state averages. It also uses state averages for the loan APR. It doesn't consider HOA fees or mortgage insurance, which by the way sounds like a scam. If a bank is so worried about you paying back a loan, that they require insurance on the loan in addition to collateral, they should not be lending you money in the first place. Anyway, there are probably a bunch of other details I'm not aware of that should be considered before deciding whether to buy or rent.
Hence...
Disclaimer:
This is not an investing tool. Do not use this as an investing tool. If you use this as an investing tool, you might see that buying a house can be a terrible idea and miss out on the opportunity of lifelong debt or the thrilling experience of bankruptcy.
Instructions:
- Income: Enter your monthly adjusted gross income. This is only used to trigger warnings about debt-to-income ratios and insufficient funds. If you don't care about that, just max it out.
- Debt: Enter your monthly debt payments. This includes credit cards, student loans, car payments... that sort of thing.
- Expenses:Enter your monthly expenses. This includes all expenses that aren't covered by debt, such as groceries, utilities, etc. It does not include savings, rent, or mortgage.
- Housing + Savings: Enter the sum of your housing cost (rent or mortgage) plus your monthly contribution to savings. The purpose of this field is to track the difference between rent and mortgage payments and add it to the savings that goes toward accumulated wealth for each line. Assume for example, rent is 1000 and the mortgage is 1500. If housing + savings is 1500, then the Rent line will accumulate $500/month from savings (net -$500/month), whereas the Buy line will accumulate $0. If rent is 1400 and the mortgage is 1200, then the Rent line will accumulate $100/month (net -$1300/month) and the Buy line will accumulate $300. (The net accumulated amount for the Buy line includes the principal portion of the mortgage, which changes over time.)
- Rent: Enter your monthly rent. This is the only cost associated with the accumulated wealth of renting. The amount that goes toward savings is the difference between rent and housing + savings.
- Purchase Price: Enter the purchase price of the house, condo, or whatever. This will calculate the mortgage payment based on state average APRs. The amount that goes toward savings is the difference between the mortgage and housing + savings. Savings and the principal portion of the mortgage payment both add to accumulated wealth.
- Down Payment: Enter the down payment for the home. This is subtracted from the purchase price to determine the mortgage payment. It is added to the initial value of the Buy line, since it is goes toward principal. It is also added to the initial value of the Rent line, since it's assumed this money would stay in savings if it wasn't going toward a purchase.
- Closing Cost: I have no idea how to figure out closing cost. Just put a number in here. It gets subtracted from Buy, and added to Rent.
- Term: Enter the length of the loan in years.
- State: Pick a state, any state.
- Fantasy: This is where the magic happens. Are you expecting the value of your purchase to increase by 5% every year for the next 40 years? Then enter 5 here. The math behind the this field is very likely wrong and for entertainment only.
Definitions:
- PTI: Total Mortgage Payment to Effective Income Ratio. This is the mortgage principal, interest, property taxes, and insurance divided by adjusted gross income. This should be under 31%. [1]
- DTI: Total Fixed Payments to Effective Income Ratio. This is similar to PTI but includes other debt payments, such as credit cards and student loans, again divided by adjusted gross income. This should be under 43%. [1]