A Formula to Understand the “Cost of Homeownership”

Looking at these figures might give you a better clue of whether you should be renting or buying

Median sales price of houses sold in the United States. Source: FRED.

It’s a mortgage, you’re told. It builds equity, society says. The money doesn’t get wasted going to rent, you think.

Deep down, there is a foundational mismatch between what we believe we are getting ourselves into and the reality of our new situation. On the surface, a mortgage is simply a monthly, fixed payment you’re giving the mortgagor for the amount of months that you’ve agreed.

Adjacent to that number, however, is a “cost” that we don’t talk about. This cost involves the usual suspects:

• Property taxes
• Maintenance costs
• Interest rate
• House value
• Federal income tax rate

Outside of your income tax rate, these are elements that you aren’t thinking about when you’re renting.

Using this formula, where: