I remember visiting one of the early rent vs. buy calculators online more than five years ago. I was amazed that by plugging in a mere three to five snippets of financial information such as my current rent, house price and tax bracket and then -- instantly -- the site could spew out a cursory answer like "makes sense to buy now".
How incredible that the Gods of Online Lending could predict a potential home buyer's fate in less than one minute!
They couldn't then and they can't now. In fact, in weighing the reliability of online rent vs. buy calculators today, some can erroneously persuade or dissuade prospective buyers if generic, pre-programmed information is not personalized to mirror the buyer's individual situation. And even then, many sites use their own built-in default information, like including the costs required to eventually resell the property when first tabulating rent vs. buy. As you'll see from the site evaluations that follow, online calculators have little similarity in the way information is evaluated and even less consistency in the rent vs. buy decisions generated.
We visited three online sites -- HomeFair, DecisionAide, and E-Loan. As our working example, we said we wanted to purchase a $125,000 home using a $10,000 down payment, 7% thirty-year loan, anticipated that appreciation for the neighborhood will be approximately 4% per year, and said we fall into the 15% tax bracket. The property tax rate is 2% of the assessed value per annum and the rent we'd pay for renting a house like the one we'd purchase would be $650 per month. The minimal amount of time we'll keep the home is three years.
The first site we visit is HomeFair, one of the early sites for online real estate calculators and now linked as a tool to HomeStore.com. The "rent vs. buy" link is on the left of the home page, under "Financial Calculators."
After filling in just eight boxes with information from our working example, we clicked on "calculate" and received the answer "buying versus renting will cost you $184 more per year'" In other words, the site says, the rent vs. buy question is "too close to call." The site then encourages the visitor to change various pieces of information, like the annualized appreciation amount for the property to obtain different results. Since we were on the overly-optimistic side of reality with our 4% appreciation estimate, my guess is that we should leave things alone. Bottom line: The HomeFair calculator did not render a definitive answer.
At DecisionAide we found a unique variation of the rent vs. buy question in the form of "Buy Now or Save First."
Hosted by writer/mortgage professor, Jack Guttentag, we're asked for myriad additional info. Stats like the number of months we'd continue renting if we didn't purchase, plus discount points and other closing costs we'd pay. After plugging in our working example info (including the fact that the site estimates we could save an additional $5,000 if we wait twelve months to buy) the calculator returns the following: "The Cost of Saving First Exceeds the Cost of Buying Now by: $2,106. Saving first would be the better choice only if your monthly rent is less than: $485."
Wow, not only does the calculator determine that it will actually cost us money to accumulate a larger down payment, the rent we'd pay in order to reverse these results would be an unrealistically low $485. A real plus on the site is the consideration given to the reduction in loan balance over the three years we'd hold the property since it's a factor often overlooked on sites like these.
One might assume that the third site we visit, E-Loan, might be inclined to give us a quick go ahead to "buy" since their primary business is to facilitate mortgage loans. But not only are their calculators somewhat buried at the bottom of the homepage under "Tools and Resources," the response after inputting our working information is "By renting your home versus buying you will have saved $2,939.01 over the next three years. The breakdown of this analysis is provided below."
And what a breakdown it is -- complete with "Before tax savings," "After tax savings" -- even "Investing compared to appreciation on the home." Unique to this site is the inclusion of a factor termed "closing costs to SELL the home" (using a default factor of 6%) plus a sum for annual home maintenance (using a default factor .8%). Since we stated that we might hold the house only three years, factoring in the costs to resell the home undoubtedly weighed the purchase against us. The word from site #3 is to stay the course as a renter.
There you have it. Three online rent vs. buy calculators offering three different decisions for the same buyer profile! What happened to the argument that technology was supposed to make tough decisions -- like buying a home -- easier?
Dream on. Web sites, especially of the calculator variety, exist to show a thumb-nail sketch of the pros, cons, and assist the consumer in reaching his or her pragmatic, yet highly individualized, decision. They're interesting and educational -- but not the equivalent of individualized consultations with brokers and lenders.