3 0 / 6

Rent or Buy?

Evaluating Alternatives

in the Shelter Market

U.S. Department of Labor 

Bureau of Labor Statistics 

1979

Bulletin 2016
For sale by the Superintendent of Documents, U.S. Government Printing Office

Washington, D.C. 20402

Stock Number 029-001-02309-0
Rent or Buy?

Evaluating Alternatives

in the Shelter Market

U.S. Department of Labor 

Ray Marshall, Secretary

Bureau of Labor Statistics 

Janet L. Norwood 

Acting Commissioner 

May 1979

Bulletin 2016

Preface

The wide variety of choice in today’s shelter market, the 

mobility of American families, and the opportunities for 

returns on savings in investments other than housing have 

all contributed to the complexity of decisions on whether 

to rent or buy one’s shelter needs. As a result, the decision 

cannot be based on a simple comparison of the monthly 

outlays for owning and renting. This pamphlet describes 

a method of analyzing the financial costs and benefits of 

owning a home compared to renting in combination with a 

program of regular monthly savings over a specified period 

of time.

The background information on shelter expenditures 

and price changes affecting shelter costs was developed 

from the regular programs of the Bureau of Labor Statistics 

in the area of prices and living conditions but also incorporates data from other sources.

This pamphlet, first issued in 1974, has been updated to

depict more recent economic conditions that affect shelter 

decisions. It was prepared by Raymond W. Gieseman, under 

the direction of Stephen Baer, Chief, Branch of Consumer 

Expenditure Studies, in the Division of Living Conditions 

Studies, Eva E. Jacobs, Chief. The text continues to reflect 

helpful suggestions of Georgena Potts (retired) and Rosalie 

Epstein of the Bureau’s Office of Publications. Credit is 

also due Daniel H. Ginsburg, Chief, William J. Marshall, and 

other staff members of the Housing and Services Branch of 

the Division of Consumer Prices and Price Indexes for their 

assistance in the project, and to Mary F. Parran for assisting 

in preparing the final manuscript.

Material in this publication is in the public domain and 

may be reproduced without permission. Please credit the 

Bureau of Labor Statistics and cite Rent or Buy? Bulletin 

2016.

Contents

Page

Introduction.................................................................................................................................................... 1

Parts:

I. Differences between owning and renting................................................................................. 2

II. Analyzing shelter costs and re tu rn s......................................................................................... 4

III. Comparing investment returns from owning and renting........................................................ 9

Appendix: Supplementary tables for analyzing shelter costs and re tu rn s.............................................. 17

v

Introduction

Should I rent or buy?

At some time in your life, you are likely to face a choice 

between owning or renting a house or other shelter. The 

decision to own or rent depends on many things. These can 

be looked at from three aspects:

• What kind of shelter meets your preferences and needs?

• How much is it going to cost and how much can you 

spend each month for shelter?

• How can you make the best investment of your money 

while obtaining shelter that meets your needs?

The personal preference aspect. Looking at it from the first 

aspect, you will want to consider such factors as your age 

and family status, the stability of employment of the 

various members of the family, and the likelihood of your 

moving from one location to another.

Beyond these, the choice has some highly subjective 

elements. Do you like to “putter around” the house and 

yard on do-it-yourself projects, or do you dislike having to 

be responsible for maintenance, small repairs, lawn tending? 

Is the idea of “putting down roots” and gaining homeowner status in the community important to you?

Because shelter requirements and wants vary widely 

from individual to individual, from family to family, and 

from one time to another, it is not possible to make 

any blanket statement about the kind of shelter that is 

“best.” It is not likely that anyone else can give you much 

guidance about the weight to be given to all the different 

subjective considerations which enter into the decision.

The cost aspect. A second aspect of the shelter decision 

concerns the costs you will incur and how much you can 

afford to spend for the kind of shelter you want and need. 

How different are costs of ownership and rental? Is there 

any way to compare them? What can you afford to spend?

The amount you spend for shelter is influenced by 

personal considerations and by your income, both your 

present income and what you expect it to be in the future. 

Information on what others spend for shelter is given on 

page 2. Costs when owning are analyzed in Part II, and 

Part III provides you with a basis for comparing the costs 

of owning and renting shelter.

The investment aspect. The third aspect of shelter decisions 

concerns the prudent investment of your money. Would 

you be better off investing your money in homeownership 

over a period of time, or saving your downpayment money 

and setting aside an amount each month, putting these 

funds into savings accounts or stocks and bonds, and so on?

This pamphlet is designed to help you analyze these 

investment factors and apply them to your own situation, 

so that you can make a judicious decision as to the better 

course for you to follow. The pamphlet describes and 

illustrates a technique for estimating the various costs and 

returns of being a homeowner or renter and then takes you 

step by step through the decision process with examples 

and worksheets so you can determine what the alternatives 

are for you, on the basis of choices and market conditions 

in your own area. The appendix gives additional details 

which you will need in working out your examples.

1
Part I. Differences betw een

owning and renting

Can you afford to own?

If you are thinking of buying a home, you will need 

enough money to make a downpayment on the purchase. 

This can be an important barrier to homeownership for 

families and individuals who do not have adequate savings. 

On the other hand, when savings are sufficient to allow a 

choice between buying or renting, there is need to weigh 

the advantages of investing savings in shelter compared 

with other investment forms.

Unlike buying, there is no shelter investment requirement when you rent. In addition to saving the downpayment required to buy shelter, renters also do not have the 

settlement costs that are involved in buying and selling 

a house.

Renters do not have the long-term commitment to save 

regularly that homeowners have taken on through longterm financing of their home purchase. However, when the 

monthly cost to rent is less than to own, renters also have 

this same opportunity to save regularly. When these savings 

can be invested along with the savings from initial costs of 

ownership, returns while renting can be attractive.

How much should you spend for shelter?

Whether you buy or rent, you must consider the proportion of your income you want to spend for shelter. Many 

elements enter into the decision, varying with individuals, 

locations, and life styles. There are no hard and fast rules.

Commonly heard rules of thumb suggest that the average 

family or individual should spend about one-quarter of income for shelter (sometimes stated as “one week’s pay out 

of every month”), and that a buyer ordinarily should look 

for a house within a market price 2x/i times his or her 

annual income. Data available from actual spending by 

families give perspective to these conventional rules of 

thumb and to the suitability of any generalization that 

would be applicable to all families.

The rules cited above do not include outlays for utilities. 

However, when comparing homeownership costs with 

rental rate quotations, it is desirable to use a concept which 

includes these outlays. Therefore, the term “shelter” as 

used in this pamphlet has been broadened to include 

utilities—heat, electricity, water, and sewerage, but excluding telephone.

Information on actual shelter expenditures obtained by 

the Bureau of Labor Statistics in a national survey of 

families and individuals in 1972 and 1973 indicates that, 

on the average, owners and renters spent 18 percent of

their annual income on shelter, including utilities. For 

homeowners, shelter expenditures averaged 16 percent of 

income in 1972-73, and included outlays for mortgage 

interest and principal, property insurance, property taxes, 

maintenance and repairs, and utilities. For renters, shelter 

outlays, including utilities, averaged 21 percent, but their 

income, on average, was 40 percent less than that of homeowners.

Recent homebuyers—those who bought new homes in 

1971 and 1972—spent 20 percent of their 1973 income on 

shelter and utilities. The reported market value of owned 

homes was 1.85 times annual income for both recent 

buyers and all homeowners. Average income for recent 

buyers was 25 percent higher than for all homeowners.

Results of the survey also indicate that higher income 

families spent a smaller proportion of income on shelter 

than families with smaller incomes. This was true for both 

homeowners and renters.

How do tax benefits affect shelter costs?

If you decide to buy shelter, you may benefit by being 

able to deduct a part of your ownership costs when filing 

your income tax returns. Amounts spent for interest and 

taxes are deductible items in Federal and many State and 

local returns. The amount you save will depend on your 

income and the amount of other expenses you have to 

itemize. These savings tend to lower the cost of owning. 

Renters do not have similar tax benefits for any portion 

of their shelter outlays.

How do price changes affect costs of owning or renting?

Over time, costs of shelter change in response to price 

change. Home purchase prices and mortgage interest rates 

have moved upward in recent years, as have property taxes, 

property insurance rates, and prices of maintenance and 

repair items and services, fuel, and utilities.

The impact of higher house prices and mortgage interest 

rates is felt by home buyers when they seek to establish the 

amount of the regular payment required to buy a house or 

condominium. Once the unit is purchased, however, the 

monthly payment typically becomes fixed and does not 

vary with future changes in purchase prices or mortgage 

interest rates.1 In this way, recent home buyers tend to have

'Home loans where the monthly mortgage payments change

in response to changes in mortgage interest rates are discussed on

p. 5.

2
larger monthly mortgage payments than homeowners who 

bought comparable shelter in earlier years.

Amounts for other components of homeownership 

costs—taxes and insurance, maintenance and repairs, and 

fuel and utilities—have increased over time as a result of 

price change. Owners with comparable shelter units are 

affected similarly by these price changes, regardless of when 

they purchased their homes. All owners experience similar 

percentage increases in these components of homeowner 

costs due to price change, but the increase in dollar costs 

is greater for owners of larger homes than for smaller ones.

Renters also experience the effects of price change as 

landlords pass on increased costs resulting from higher 

taxes, insurance rates, maintenance, repair, and service 

costs, and fuel and utility charges. Landlords may also 

periodically adjust rental rates to reflect the current market 

value of shelter units, even though their monthly mortgage 

payments remain fixed. To the extent this is so, renter 

costs will increase more over a period of years than will 

costs for homeowners with fixed monthly mortgage payments.

How does the type of shelter affect the comparison?

The type of shelter you are interested in is an important 

factor affecting costs and, therefore, the decision to buy or 

rent. Recent trends in the shelter market have increased 

the variety of shelter types available for owning or renting. 

As a result, the comparison of costs and returns between 

buying and renting can involve similar or widely divergent 

shelter types.

Between 1960 and 1970, many apartment units were

constructed to accommodate large numbers of young 

people who were entering the job market for the first time, 

and young couples who were setting up housekeeping but 

lacked the resources to buy. Many of these have since 

acquired some savings and have started families, which 

make them likely candidates for homeownership. But rising 

construction costs and higher prices for homesites have 

made it more costly for them to buy. During the same 

period the numbers of older individuals and couples whose 

families were grown also increased. These factors encouraged a wider variety of shelter types. Typical is the 

trend toward combining the features of apartment-style 

living with homeownership.

Ownership of condominium and cooperative apartments 

is growing. Many of these units are attached townhouses 

or in multi-unit structures (garden style “walk-up” apartments or elevator high-rises). In the condominium form of 

ownership, the owner-occupier owns a single unit within 

a structure and shares in the ownership of the grounds and 

common areas. Under the cooperative ownership plan, each 

owner-occupant owns a prorated share of the total project. 

Mobile homes offer still another option of ownership to 

the prospective home buyer.

Because shelter units for sale and for rent differ widely 

in type, size, age, location, underlying financing, and so 

forth, you may seldom have the opportunity or the need 

to determine whether, for the same quality or quantity o f

shelter, it is cheaper to own or rent. But there is need for 

some method of comparing costs and returns for types of 

shelter that meet your requirements. Parts II and III provide a basis for such a comparison.

3
Part II. Analyzing shelter

costs and returns

The amount you can spend for rent and be as well off— 

from the viewpoint of investment—as if you owned your 

home, over a specified number of years, depends upon a 

number of factors. These include (1) the terms of purchase 

for shelter that meets your needs; (2) the monthly outlays 

required to retain and maintain your home; (3) the tax 

savings you experience as a homeowner; (4) your estimate 

of net proceeds from the sale of your home after a given 

number of years; and (5) the plans you make for alternative 

use of your money. The following sections provide background information on each of these factors and several 

examples to illustrate the analysis.

Terms of purchase

Few home buyers can buy a house outright. They have 

to borrow, arranging for the purchase in one of the following ways: (1) Conventional financing; (2) financing guaranteed by the Veterans Administration (VA)—available only 

to veterans; and (3) financing insured by the Federal 

Housing Administration (FHA). Conventional loans are 

made by private lending institutions (primarily banks and 

savings and loan companies), according to terms agreed to 

by the borrower and the lender. VA an<) FHA loans are also 

financed by private lenders, but are subject to government 

regulation, and the lender is insured against possible default 

in payment.

Downpayment. The downpayment depends on the appraised value of the property and the amount the lender 

agrees to finance. T^ere are no minimum downpayment 

requirements for conventional loans, but the amount commonly runs between 10 and 30 percent of the appraised 

value. The downpayment for government-backed loans is 

also determined by agreement between the borrower and 

the lender, but minimum requirements have been established by law. Under recently approved legislation 

governing FHA loans, the buyer must pay at least 3 percent 

down on the first $25,000 and 5 percent on the excess over 

$25,000. The mortgage must not exceed $60,000. There is 

no minimum downpayment required for VA loans unless 

the asking price expeeds the appraised value of the 

property.

Settlement costs. Another item of cost in buying a house 

is settlement. These costs occur when property is exchanged. They include closing costs, loan discounts, prepaid 

items, and sales commissions. Closing costs are charges for

obtaining the mortgage loan and transferring the real estate 

title. A loan discount is a charge assessed by a lender to 

improve his return (these are sometimes called mortgage

points). Prepaid items are amounts required for advance 

payment of real estate taxes, insurance premiums, and 

other assessments such as fees paid for improvements to 

sidewalks, roads, and sewers.

For buyers, settlement costs include closing costs and 

amounts required for prepaid items. The settlement costs 

for sellers are loan discount payments and sales commissions.

Settlement costs vary from locality to locality and with 

the purchase price of the house. In a study of applications 

received for government-backed loans during March 1971, 

settlement costs (including loan discount payment, if any) 

averaged $1,937 or about 10 percent of the contract sale 

price.2 The study stated: “It is apparent that the two most 

expensive settlement cost items were loan discount payments, or points, and sales commission. Neither of these 

costs, however, was paid by the buyer at closing. Therefore, 

buyer settlement costs represented only about 23 percent 

of total settlement costs. The seller absorbed more than 

three-quarters of total settlement costs and probably 

attempted to recapture some or all of this expense through 

an increased sale price.” Thus, settlement costs amounted 

to about 2 percent of the market price for the buyer and 

8 percent for the seller. Comparable data were not available 

for homes with conventional loans.

Mortgage term. The term of the mortgage may differ with 

the three types of loan programs. For example, in 1977 

mortgage terms for conventional loans averaged 28 years 

for new houses and 26 years for existing houses, while 99 

percent of the VA-guaranteed loans on new houses and 93 

percent of the loans on existing houses had mortgage terms 

of 26 to 30 years. The full term for FHA loans on new 

houses in 1977 averaged 30 years and for existing houses, 

29 years.

Mortgage interest rates. In recent years mortgage interest 

rates have fluctuated considerably for all types of loans. 

Rates are usually different for government-guaranteed loans 

and conventional loans. Ceiling rates for FHA- and VA2 Report on Mortgage Settlement Costs (Washington, U.S. Department of Housing and Urban Development, and Veterans Administration, January 1972).

4
Table 1. Interest rates for FHA, VA, and conventional loans, 1976-78

FHA VA Conventional

Date set Ceiling

rate

Date set Ceiling

rate

Year Contract

interest rate

January 1976 8% January 1976 8% 1976 8.92

March 1976 81/2 March 1976 81/2

October 1976 8 October 1976 8

May 1977 81/2 May 1977 81/2 1977 8.83

February 1978 8% February 1978 8% 19781 9.09

May 1978 9 May 1978 9

June 1978 91/2 June 1978 91/2

1 January-June.

guaranteed loans are established jointly by the respective 

agencies and are announced by the Secretary of Housing 

and Urban Development. Rates on conventional loans are 

regulated by State governments. Ceiling and contract 

interest rates for loans on existing houses since 1976 are 

shown in table 1.

When the going interest rate is above the State or 

Federal ceiling rate, it is sometimes necessary to pay a loan 

discount, or “mortgage points”, in order to obtain a loan. 

The additional charges for mortgage points are normally 

assessed at the time of settlement and are included in 

settlement costs, discussed earlier.

FHA-backed loans are subject to an annual insurance 

premium of one-half of 1 percent of the mortgage balance 

owed. Some lenders may also require private mortgage 

insurance on conventional loans. Premiums will vary with 

the individual insurer.

Effects o f terms on cost o f financing. For most home 

mortgages, the amount borrowed is repaid (amortized) 

with a series of equal monthly payments over the life of the 

mortgage. The price and amount paid down on a home 

determine the size of loan required. The mortgage term 

and the rate of interest which prevails at the time of purchase determine the amount of the monthly payment and 

total cost of financing such a loan. The following example 

illustrates how the cost of financing is affected by the 

mortgage term and the interest rate.

Suppose a $55,000 home is purchased with a $5,000 

downpayment and the balance is financed for 20 years at 

9 percent interest. The monthly mortgage payment will be 

$450 and the total outlay for the loan will be $108,000, 

of which $63,000 is interest. Increasing the mortgage term 

from 20 to 30 years lowers monthly payments to $402.50, 

but increases the amount paid in interest by $36,900, 

making the total outlay for the loan $144,900. Similarly, 

increasing or decreasing the mortgage interest rate affects 

both the monthly payment and the total cost of the loan. 

For additional information to help you evaluate the cost 

of financing home loans, see table A-l in the appendix.

Other types of loan amortization plans may be encountered in the marketplace when you are investigating 

home purchase. Some of these contain provisions for 

varying the amount of interest charged on the loan. Others 

provide for lower monthly mortgage payments in the 

initial years of ownership. The lender may offer a loan discount on some of these plans.

Loans which contain provisions enabling the lender to 

vary the rate of interest charged on the loan in response 

to changes in prevailing market interest rates are generally 

called “variable rate mortgages.” When the interest rate 

changes, either the amount of your monthly payment 

changes, or the mortgage term is adjusted, or both. If the 

monthly payment changes, this affects your monthly 

shelter costs. If the mortgage term changes, it affects the 

amount you still owe on the loan and, therefore, your net 

proceeds if you sell the house before the mortgage is 

retired. Of course, when interest rates remain stable, your 

shelter costs and returns when owning can be analyzed in 

exactly the same way for a variable rate mortgage as for a 

loan with equal monthly payments.

First-time home buyers may find ownership “more 

affordable” if their home loan calls for lower monthly 

payments in the earlier years. These lower payments are, 

however, offset in later years with higher monthly payments, which should be anticipated when analyzing your 

shelter costs over time. The lower initial payments will 

also affect the amount still owed on the loan if you sell 

your house before the loan is fully retired.3

Gross monthly outlays of homeowners

In addition to the monthly mortgage payment, other 

shelter outlays incurred on a regular basis are those for real 

estate taxes, property insurance premiums, costs of maintenance and repairs, and allowances for fuel and utilities.

3 For additional information on various loan types, see such

sources as Federal Home Loan Bank Board Journal, Feb. 1976.

5
Excluded from this discussion are major improvements to 

house and grounds.

Estimates for some types of costs—taxes, insurance, and 

utilities—usually can be obtained from the seller or the real 

estate agent. (Also, assessments and tax rates are matters 

of public record and can be verified in the appropriate 

office of local government). Maintenance and repair costs 

are more difficult to estimate for a particular house. In the 

1972-73 BLS Consumer Expenditures Survey, expenditures 

by homeowners for maintenance and repairs averaged 

between eight- and nine-tenths of 1 percent of the market 

value of their homes.

Monthly mortgage payments for principal and interest 

established at the time of purchase usually do not change 

during the life of the mortgage unless the loan is refinanced. 

Property taxes, however, as well as insurance rates and 

prices of maintenance and repair items and services, are 

not fixed. Table 2 shows year-to-year changes over the 

last decade for these items and for fuel and utilities.

Effects of tax savings on shelter costs of homeowners

One of the potential benefits of homeownership is a 

reduction in the amount of personal income tax that must 

be paid. Interest paid on the mortgage and the real estate 

taxes assessed against the property are tax deductible under 

Federal and most State and local income tax regulations, 

if deductions are itemized.

The effect of these tax savings when prorated monthly 

is to lower the homeowner’s gross monthly outlay for 

shelter. The amount of such savings depends on the amount 

of income that would be taxed if deductions were not 

itemized and on the rate of taxation on this income.

Typically, the amount of interest paid on home loans is 

highest in the first year and declines over time as the loan 

balance declines. On the other hand, property taxes tend 

to rise, due to higher property values and changes in tax 

rates. Having more property taxes to deduct tends to offset 

the smaller amounts of interest that can be deducted each 

year a house is owned.

Estimating net proceeds from sale of house

The decision to purchase a house should include an 

estimate of what the net proceeds would be if the house 

were sold at some future date. Buying a house usually 

requires investing some savings at the time of purchase. 

Further, additional money is regularly invested through the 

monthly principal payments—sometimes referred to as 

“forced savings.”

The value of a homeowner’s savings in the house depends on the market price of the house at the time of sale, 

selling costs, and any debts or liens against it. If a house is 

sold at the original purchase price, net proceeds will be 

amounts initially invested in downpayment and settlement, 

plus whatever portion of mortgage payments has been 

applied to reducing the principal, and minus selling costs 

and any taxes owed. However, if the value of the house has 

risen, the net proceeds from its sale may amount to more 

than the owner’s purchased equity.

For example, assume a $42,000 house is purchased with 

a downpayment of $4,200, and the remaining $37,800 is 

financed at 9 percent for 30 years. Settlement costs are 

$800. After 10 years, the house is sold for $75,000 and 

selling costs are $6,000 (8 percent of market value). The 

net proceeds and gain from the sale of the house might 

look like this:

Sale price of house......................................................$75,000

Less amounts owed at time of sale:

Selling costs...................................................... 6,000

Mortgage balance owed.................................... 33,640

Net proceeds from sale of house............................... 35,360

Less amounts invested:

Downpayment and settlement co sts............. 5,000

Reduction in mortgage balance 

(principal payments).................................... 4,160

Gain from appreciation.............................................. 26,200

Rate o f change in market value o f owned home. The future 

market value of a house depends on its location, its age and

Table 2. Changes in Consumer Price Index for all items, selected shelter components, and fuel and utilities, 1969-78

Consumer Price Percent change from preceding year

Percent

change.

Index item 1970 1971 1972 1973 1974 1975 1976 1977 1978 1969-78

All items 6.0 4.5 2.9 5.9 11.0 9.3 5.9 6.9 7.3 78.0

Shelter item:

Property taxes and

insurance 9.9 7.9 9.8 4.8 0.0 7.6 6.9 10.1 7.4 85.4

Maintenance

and repairs 7.6 8.2 4.9 7.8 13.0 9.2 6.6 7.8 7.9 101.5

Fuel and utilities 3.1 7.5 4.5 4.8 19.0 11.7 8.9 11.1 7.8 110.4

NOTE: Changes calculated from published indexes for June of Urban Wage Earners and Clerical Workers,

each year. 1978 data are from Consumer Price Index for All Urban

Consumers; data for earlier years are from Consumer Price Index for

6

SOURCE: Bureau of Labor Statistics.
structural condition, its adaptability to the tastes and needs 

of buyers, shifts in population, family income, and general 

economic conditions. Neighborhood and community 

characteristics also have an effect on its future market 

value. In some localities, houses on an average may appreciate 6 or 8 percent a year, or more; in others, they may 

bring less than the amount originally paid. In the example 

above, the house increased in value from $42,000 to 

$75,000 in 10 years, or an average of approximately 6 

percent a year.

Two factors that tend to make homes appreciate in 

value are (1) rising costs of building new houses and (2) the 

higher cost of land suitable for housing. When the total 

cost of new houses goes up, home buyers tend to bid up the 

prices of existing houses.

The cost of construction for residential structures increased sharply between 1972 and 1977, rising more than 

75 percent during the period-an average annual increase 

of 8Vi percent a year. This means that a house built for 

$20,000 in 1970 would have cost about $35,000 to build 

in 1977.

Another reason for rising home prices is the rise in the 

value of the land on which the house is situated. In recent 

years, the scarcity of suitable sites for building in major 

metropolitan areas has caused land values to increase. Cost 

of homesites for new and existing homes under FHAinsured loans increased nearly 50 percent between 1970 

and 1977.

Rising construction costs and site costs are reflected in 

the prices of new and existing one-family homes purchased 

with FHA-backed loans. Between 1970 and 1977 the 

average sale price for new and existing homes increased 

nearly 60 percent, or an average of about 7 percent a year. 

These rates compared with an average annual increase of 

just over 6)6 percent in the prices of all consumer goods 

and services over the same 7-year period.

The long-term trend is thus for houses to appreciate in 

value, but of course there is no guarantee that a particular 

house will do so, particularly during periods of recession. 

For example, one-family houses in 22 cities declined almost 

29 percent in market value between 1925 and 1933. For 

the same period, the “all items” price level fell 26 percent.

Selling costs. Amounts that have to be paid at the time a 

house is sold are called selling costs. These usually include 

a brokerage fee paid to the real estate agent and may 

include a loan discount payment to enable the buyer to 

obtain a loan, if the house is sold to a buyer who finances 

the purchase through a government-backed loan.

The cost of selling a house can reduce the advantage of 

home purchase. How the buyer fares depends on the 

length of stay in the house and the rate of appreciation. 

For instance, if the selling costs amounted to 8 percent of 

the market price, the owner would have to realize an 

increase of 8 percent or more in the price of the house in 

order to recover the investment. If the rate of appreciation 

was approximately 6 percent a year, the owner would have

to keep the house at least 2 years in order to get back 

enough to balance out the initial downpayment and settlement costs.

Mortgage balance owed. A final deduction, before net 

proceeds from the sale of the house can be estimated, is 

the amount owed on the mortgage.

In most home financing, loans are amortized, or paid 

off, by a sequence of equal payments over a number of 

years. Since the loan balance is highest when the loan is 

first obtained, the amount applied to interest consumes a 

major portion of the regular monthly payments in the First 

few years, and only a small amount of the monthly payments goes to the purchase of additional equity. Thus, if a 

house is sold within 5 or 10 years of purchase, a substantial 

portion of the proceeds may be needed to retire the balance 

of the mortgage.

For example, on a 30-year, 9-percent loan, 96 percent 

of the initial loan amount would still be owed after 5 years 

of ownership. Even after 10 years of ownership, 89 percent 

of the principal would remain to be paid. The percent of 

the loan balance still owed on this loan at different times 

is shown below:

After 5 years............................................................. 96

After 10 years............................................................. 89

After 15 years............................................................. 79

After 20 years............................................................. 63

After 25 years............................................................. 39

After 30 years.......................................................... 0

Appendix table A-2 shows similar percentages for 20-, 

25-, and 30-year loans at different interest rates.

Alternative investment opportunities

Some may prefer to put their money to work in other 

forms of investment, rather than buy a house. Other types 

of investment generally make it easier to respond to a 

change in circumstances or to take advantage of changing 

rates of return.

Downpayment and settlement costs. Invested in a savings 

account, funds (the equivalent of which the homeowner 

uses for downpayment and settlement costs) may earn 

5, 6, or 7 percent a year, or more. The value of an investment of $5,000, compounded annually, is shown in table 

3 for selected periods and rates of return. For further 

details on how these amounts were determined, see appendix table A-4.

Thus, at the end of a year $5,000 invested at 6 percent 

would have returned $300 in interest. To gain this same 

amount in one year, the purchaser who used the $5,000 to 

buy a $42,000 house would have to sell it for enough to 

recover the investment (downpayment and principal payments, and selling costs), plus the $300 that could have 

been earned by investing the money at 6 percent.

7
Regular monthly saving. When renting, additional savings 

may be needed to offset benefits homeowners have in 

being “forced” to save regularly through monthly mortgage 

principal payments and having houses that appreciate in 

value over a period of years. These savings are possible 

when the total cost to rent per month is lower than the 

monthly shelter outlay to own.

A regular savings program for renters may require more 

self-discipline than for those who buy. However, the 

cumulative effect of savings—often overlooked—might 

provide an incentive for such self-discipline. Regular savings 

of as little as $50 a month ($300 a year) could earn the

Table 3. Value of $5,000 compounded annually at selected

rates of return

Period 5 percent 6 percent 7 percent

1 year $ 5,250 $ 5,300 $ 5,350

5 years 6,381 6,691 7,013

10 years 8,144 8,954 9,836

20 years 13,266 16,036 19,348

30 years 21,610 28,717 38,061

Table 4. Value of

rates of return

savings of $50 per month at selected

Period 5 percent 6 percent 7 percent

5 years $ 3,400 $ 3,450 $ 3,550

10 years 7,700 8,100 8,550

20 years 20,300 22,650 25,400

30 years 40,750* 48,750 58,450

amounts shown in table 4 if invested for the periods and 

at the rates of return illustrated. These values are based on 

information provided in appendix table A-5.

The combined value of the $5,000 investment and of 

savings of $50 a month over a 10-year period at 6 percent 

interest is $17,054 ($8,954 plus $8,100). This amount 

would accrue to the renter and could partially or fully 

offset net proceeds from owning and then selling a home. 

If it were possible to save as much as $165 per month by 

renting, the investment amount would total $35,684 

($8,954 plus $26,730) after 10 years and would compare 

favorably with the net proceeds from owning illustrated in 

the example on page 6. Average annual yields for selected 

types of investments are shown in appendix table A-6.

8
Part III. Comparing

investm ent returns from

owning and renting

The following section outlines procedures which can be 

used to estimate how much you could spend for rented 

shelter and be as well off, from the viewpoint of investment, as if you bought a house. Over time, as your income 

and shelter needs change, or if your job requires that you 

move, you may wish to reconsider your shelter requirements. At that time, regardless of whether you are an 

owner or a renter, these procedures can be applied to 

evaluate your new alternatives.

There are six steps in the procedure:

1. Determine the purchase price and terms of financing 

for a house you would consider buying;

2. Estimate your gross monthly shelter outlay as a 

homeowner;

3. Estimate your net monthly shelter outlay as a homeowner;

4. Estimate your net proceeds if you were to sell the 

house at a specified price after a given period;

5. Estimate the amount of monthly savings required to 

offset net proceeds from owning, if you decide to 

rent;

Step 1. Terms of purchase and financing

Sale price of unit...........................................

Terms of financing:

Downpayment:

Amount................................................

Percent of sale price............................

Characteristics of the mortgage:

Amount borrowed..............................

Interest rate (percent).......................

Mortgage term (years to maturity) . .

Monthly cost cf debt service:

Payment to principal and interest. . .

Mortgage insurance premium (if any)1

Total to debt service per month ....

Initial outlay required to purchase:

Downpayment.........................................

Settlement cost.........................................

Total initial outlay required....................

1 The annual premium is one-half of 1 percent of the average

loan balance for the year.

6. Estimate the rent level which, in combination with a 

savings program, would equal your net monthly 

shelter outlay as a homeowner.

The first three steps help you establish the costs of 

owning a specific shelter unit that meets your needs and 

circumstances. Step 4 helps you determine the expected 

return from owning and then selling the unit after a period 

of time. Step 5 develops an alternative plan for saving the 

equivalent of these returns. In Step 6, you determine a 

rental rate that is comparable with the monthly cost of 

owning after allowing for the savings plan. Examples are 

given to illustrate the procedures. Space is provided to 

assist you in working through the steps for your own situation.

Step 1. Determine the purchase price and terms of

financing for a house you would consider buying.

In the examples, the price of the house and terms of 

financing—loan ratio, interest rate, and mortgage term— 

typify conditions for house purchase in 1977-78. Examples

Example A Example I

$52,000 $52,000

2,100 5,200

4.0 10.0

49,900 46,800

9 9

30 30

$ 402 $ 377

20 19

422 396

2,100 5,200

800 800

2,900 6,000

Your example

$

9
A and B differ only by the amount of downpayment. 

Example A illustrates a minimum downpayment under 

FHA loan requirements, and Example B uses a 10-percent 

downpayment. The lower cost for debt service in Example 

B, $396 compared with $422, is due to the larger downpayment.

For your example, your will need to determine the price 

of the house or condominium apartment to be analyzed 

and the amount of downpayment required (or that you 

plan to make). After you subtract the downpayment, the 

balance of the sale price remaining is the amount to be 

borrowed. Sometimes part of the settlement costs are also 

financed; if this is true in your case, this sum should be 

included in the amount to be borrowed.

To determine the monthly payment, you need to know 

the rate of interest on home loans and the number of years 

over which you plan to finance the balance. Then, using the 

rates in appendix table A-l and the example illustrating 

its use, you can determine the amount of the monthly 

payment.

For your example, you may have an actual estimate of 

settlement costs received from a realtor or other source. 

If this is not available, you may want to use an estimate 

based on a percent of the sale price of the house, such as 

the 2-percent estimate discussed on page 4.

Step 2. Estimate your gross monthly shelter outlay as a

homeowner.

In addition to regular monthly payments to service the 

home mortgage, your expenses will include property taxes, 

insurance, and maintenance and repair bills. You may not 

be billed each month for these costs, but they can be 

prorated on a monthly basis. You should also estimate 

average monthly outlays for utilities that would be included 

in the monthly rent check if you were renting.

Step 2. Gross monthly shelter outlay to own

In the table below, the “other monthly costs” are 1977 

average costs estimated by FHA for a house with an average 

price of $52,000.

You will find suggestions to help you estimate monthly 

amounts for property taxes, insurance, and maintenance 

and repairs for your example on pages 5 and 6.

By annualizing your gross monthly shelter outlay and 

comparing it with your gross income, you can decide at 

this point whether you can “afford” the house you have 

specified. For the $52,000 house and 10-percent downpayment (Example B), the outlay and the percentages at 

selected income levels are as follows:

Gross incom e Your

exam ple

$10,000

Gross annual

shelter outlay . . . $7,032 

Percent of

gross income. . . . 70

$20,000 $30,000

$7,032 $7,032

35 23 .

Step 3. Estimate your net monthly shelter outlay as a

homeowner.

Both mortgage interest and property taxes paid are tax 

deductible. This frequently makes it worthwhile for homeowners to itemize rather than to use the standard deduction 

when figuring their income taxes. Examples on page 11 

illustrate the potential savings in Federal income taxes for 

homeowners at different levels of income if they itemize 

their expenses for mortgage interest and real estate taxes. 

Not shown here are additional savings which may accrue to 

homeowners from similar deductions when filing State and 

local income tax returns.

In the first instance, taxes are figured when there are 

no deductions for homeownership expenses. The calculaExample A Example B Your example

Monthly debt service:

Mortgage payment................................................... ..................$ 402 $ 377

19

$

Mortgage insurance premium (if a n y ).................. ............... 20

Total to debt service each m o n th ....................................... 422 396

Other monthly costs:

Real estate taxes..................................................... ................. 94 94

Property insurance....................................................................... 12 12

Maintenance and repairs1 .......................................................... 28 28

Utilities.................................................................... .................... 56 56

Total other costs each month............................................. 190 190

Estimated shelter outlay per month:

Debt service (principal, interest, and mortgage

insurance premiums).......................................................... 422 396

Other costs............................................................... ............... 190 190

Gross monthly shelter outlay............................ ............... 612 586

1 Include monthly fees if the unit is a condominium or cooperative.

10
tions use 1977 rates applicable for married persons filing 

jointly and claiming four personal exemptions ($750 each).

In the next illustration, the tax liability with deductions 

for homeownership expenses is based on the monthly 

amounts for real estate taxes and mortgage interest shown 

in Step 2 for Example A. The $1,128 deduction for real 

estate taxes is the $94 shown in Step 2, converted to an 

annual basis. The $4,486 deduction for mortgage interest 

in Example A was obtained by annualizing the mortgage 

payment shown in Step 2 ($402 x 12 = $4,824) and calculating the amount for mortgage interest as a percent of 

the annual mortgage payment. (According to appendix 

table A-3, 93 percent of the first year’s payment goes to 

interest. Thus, $4,824 x 0.93 = $5,486).

Tax liability without deductions for mortgage interest and

real estate taxes

Your

example

1. Figure your gross income................. $25,000

2. Determine your taxes from tax

tables1:

Tax liability:

Annual.................................... 3,871

M onthly................................. 323

1 1977 Federal income tax rates.

The amount for “other” deductions, given as $2,800 in 

the illustration, includes charitable contributions, medical 

and dental expenses, other deductible interest and taxes, 

and other losses or expenses that can be itemized. This 

amount was typical for taxpayers in the $20,000-$30,000 

income range who filed Federal tax returns in 1975.

For itemizing to be worthwhile, the amount you have to 

itemize must exceed the standard deduction, or “zero 

bracket amount,” as it was called in 1977.

The zero bracket amount is based on your filing status 

without regard to the amount of personal income. The 

1977 amounts were as follows: Married, filing jointly, or 

as a qualified widow or widower, $3,200; single, or an 

unmarried head of household, $2,200; married, filing 

separately, $1,600.

Even without other itemized deductions, the amounts 

for mortgage interest and real estate taxes shown in the 

example would merit itemizing ($1,128 + $4,486 = $5,614, 

compared with $3,200).

The $117 monthly saving by itemizing mortgage interestand taxes shown at the bottom of the table was obtained 

by comparing the tax liability with and without allowable 

deductions for homeownership expenses.

The itemized tax liability for Example B (not illustrated) 

is $2,549 annually (about $212 monthly) so the tax saving 

by itemizing is $111 per month, compared with $117 in 

Example A.

Tax liability with deductions for mortgage interest and real

estate taxes

Example A

($402 monthly

mortgage Your

payment) example

1. Figure your gross income . . . $25,000

2. Itemize your deductions:

Real estate taxes............... 1,128

Mortgage interest............... 4,486

O th er................................. 2,800

Total itemized deductions. 8,414

3. Determine excess

deductions:

Total itemized deductions. 8,414

Less standard deduction1 3,200

Equals excess itemized

deductions....................... 5,214

4. Determine your taxes:

Method A (from tax tables):

Gross income............... 25,000

Less excess itemized

deductions..................... 5,214

Equals tax table income 19,786

Tax from tax table2 .......... 2,474

Method B (from tax rate

schedules):

Gross income............... 25,000

Less excess itemized

deductions.................. 5,214

Less personal exemptions

($750 each)............... 3,000

Equals taxable income . 16,786

Tax from tax rate schedule 2,656

Less general tax credit . 180

Equals Federal tax

liability....................... 2,476

Monthly tax liability (from

Method A or B )............. 206

5. Monthly tax saving by

itemizing mortgage

interest and taxes3 . . . . 117

‘ The standard deduction was called “ zero bracket amount" on

the 1977 return.

** 1977 Federal income tax rates.

3Tax saving equals the difference between monthly tax liability

without homeownership deductions and monthly liability with

deductions.

Net monthly shelter outlay can then be figured by 

subtracting the estimated tax saving from the gross monthly

11
outlay estimated in Step 2. The results for Examples A and 

B are shown below.

Step 3. Net monthly shelter outlay to own

Gross Your

income example

$25,000 $

Example A:

Gross monthly shelter outlay

(p. 1 0 ).......................................... 612

Less tax saving (from p. 11). . . . 117

Net monthly shelter outlay 495

Example B:

Gross monthly shelter outlay

(p. 1 0 ).......................................... 586

Less tax saving (not

illustrated)................................ 111

Net monthly shelter outlay . . 475

In your example, you can estimate your potential tax 

savings by refiguring your last year’s tax return, using the 

mortgage interest and property tax rates for your situation. 

If you used the standard deduction last year, you will 

need to compile a list of other deductions you could have 

used and their amounts. When the amount for “other 

items” you have to deduct equals or exceeds the standard 

deduction, you benefit from every dollar paid out for 

mortgage interest and property taxes by itemizing.

Estimated tax savings shown above are based on 

amounts of mortgage interest and property taxes paid in 

the first year of purchase. This gives maximum write-off 

allowance to homeowners, since the amount of mortgage 

interest paid will decrease as the loan balance declines. 

It is possible, however, that part of this loss of mortgage 

write-off will be offset by higher property taxes, as the 

assessment rate and the value of the house change with 

time.

Step 4. Estimate your net proceeds if you were to sell the

house at a specific price after a given period.

Before you proceed with this step and the steps that 

follow, it is necessary to determine the length of time over 

which you want to compare your alternatives when owning 

and renting. The time span you select becomes your “planning period.” In the examples that follow, values for 

planning periods of 5, 10, and 20 years are shown. Information has been provided to help you work through your own 

example for a 5-, 10-, 20-, or 30-year period.

Net proceeds represent the amount received from sale 

of the house, less the costs of selling and less the balance 

owed on the mortgage. Any proceeds in excess of these 

expenses represent 1) the return of your equity and 2) gain 

from appreciation.

It may seem unrealistic to attempt to estimate proceeds 

from the sale of a house you have not yet purchased, but 

this step is necessary if you wish to evaluate your likely 

returns as well as your costs. It requires an estimate of the 

future market value of the house at the probable time of 

sale.

Future market value of dwelling unit and selling costs

Several different rates of appreciation are used below 

to illustrate the future market value of a house priced at 

$52,000 in 1977-78 after 5, 10, and 20 years. Your estimate of the rate of appreciation for the house you are 

considering should be based on local market conditions, 

present and expected, and should allow for changes in 

general economic conditions. The data in appendix table 

A-4 will assist you with your example.

Estimated future market value of house

Appreciation After After After

per year 5 years 10 years 20 years

0 percent......................... $52,000 $ 52,000 $ 52,000

3 percent....................... 60,268 69,888 93,912

5 percent....................... 66,352 84,708 137,956

7 percent....................... 72,956 102,284 201,240

10 percent....................... 83,772 134,888 349,804

— percent, your

example . . .

For the future market prices shown above, the selling 

costs (at 8 percent of the market value of the house) would 

be as shown below:

Estimated costs of selling house

Appreciation After After After

per year 5 years 10 years 20 years

0 percent....................... $4,160 $ 4,160 $ 4,160

3 percent....................... 4,821 5,591 7,513

5 percent....................... 5,308 6,777 11,036

7 percent....................... 5,836 8,183 16,099

10 percent....................... 6,702 10,791 27,984

— percent, your

example . . .

Amount still owed on house

A mortgage loan is paid off at a very slow rate in the 

early years, but the rate accelerates as the year of final payment approaches. In Example B following, after 10 years 

the balance remaining to be paid off on the $46,800 loan 

is approximately $41,652. After 20 years, the balance 

owed is $29,484, all of which would be retired in the last 

10 years of the mortgage. Appendix table A-2 will help you 

to determine the amount that would still be owed on your 

mortgage after different periods of time.

12
Estimated balance owed on mortgage

Example A Example B Your

example

Mortgage term (in years)

(from d . 9 ) ............... 30 30

Rate of interest (percent) (from p. 9) . . . 9 9

Mortgage balance owed:

Initial balance (from

p. 9 ) .................... $49,900

47,904

$46,800

After 5 years. . . 44,928

After 10 years. . . 44,411 41,652

After 20 years. . . 31,437 29,484

Net proceeds from sale of house

The calculations shown here are for a $52,000 house 

and a hypothetical 7-percent annual rate of appreciation. 

The net proceeds follow from estimates made above.

Step 4. Net proceeds from owning 5

After After After

5 years 10 years 20 years

Step 5. Estimate the amount of monthly savings required

to offset net proceeds from owning, if you decide to rent.

If you do not buy a house, you presumably have available the amount of money you would have spent on downpayment and settlement costs. This amount has potential 

for growth in other types of investment.

In the example below, a $2,900 investment—the amount 

of downpayment and settlement costs in Example A, Step 

1—grows to $3,880 in 5 years and to $9,300 in 20 years, at 

6 percent interest a year. A $6,000 investment (from 

Example B) grows to $8,028 in 5 years and to $19,242 in 

20 years.

You can determine this growth potential, at the rate 

of return you specify, by using the table of compound 

interest (see appendix table A-4), applied to the amount of 

the downpayment and settlement costs you specified in 

Step 1. Appendix table A-6 shows the average annual 

returns on selected types of investment.

Interest and dividends received during the year are 

subject to taxation as personal income. You may want to 

allow for this by specifying a rate of return that is roughly 

net after taxes. For example, if you anticipate a 6-percent 

return per year on your money, you may want to use 5 

percent when working though your example.

Value of savings not used for downpayment and settlement

Net proceeds for Example A:

Market value of house

Initial investment and

rate of return per year

(from p. 12)............. $72,956 $102,284 $201,240 5 years 10 years 20 years

Less selling costs

(from p. 12). . . . 5,836 8,183 16,099 Example A, investment of

Less mortgage $2,900:

balance owed 5 percent............................ $3,700 $ 4,724 $ 7,694

(from above) . . . 47,904 44,411 31,437 6 percent............................ 3,880 5,194 9,300

7 percent............................ 4,069 5,704 11,223

Net proceeds . . 19,216 49,690 153,704

Net proceeds for Exam- Example B, investment of

pie B: $6,000:

Market value of house 72,956 102,284 201,240 5 percent............................ 7,656 9,774 15,918

Less selling costs . . 5,836 8,183 16,099 6 percent............................ 8,028 10,746 19,242

Less mortgage 7 percent............................ 8,418 11,802 23,220

balance owed . . . 44,928 41,652 29,484

Your example, investment of

Net proceeds . . 22,192 52,449 155,657 $

Your example: percent

Market value of house

Less selling costs. .

Less mortgage

balance owed . . .

Net proceeds . .

The net proceeds shown in the examples do not take 

into account the possibility that you may have to pay 

capital gains taxes on part of your gain.

Advantage (or disadvantage) of investing in a house

The value of money not invested in a house (downpayment and settlement costs) plus the interest earned thereon 

for an appropriate number of years is deducted from net 

proceeds from owning a house, as estimated in Step 4, to 

determine the additional savings, if any, needed to balance 

the investment gain from owning. The examples below are 

based on net proceeds shown in Step 4 and on initial in13
vestments of $2,900 (Example A) and $6,000 (Example B), 

compounded at 6-percent net return per year.

For short periods of ownership of 1 to 3 years, the cost 

of buying and selling a house can absorb much or all of 

the equity acquired. Savings not used for downpayment 

and settlement costs by renting, plus the investment return

Step 5. Additional savings needed when renting

5 years 10 years 20 years

Example A, initial investment of $2,900:

Net proceeds from

sale of house

(p. 1 3 )....................

Less alternative investment, at 6 percent

(p. 1 3 )....................

Net advantage from

investment in house.

Additional saving required each month

(at 6 percent interest)

to offset net advantage of owning1 . . .

Example B, initial investment of $6,000:

Net proceeds from

sale of house..........

Less alternative investment, at 6 percent. .

Net advantage from

investment in house.

Additional saving required each month

(at 6 percent interest)

to offset net advantage of owning1 . . .

$19,216 $49,690 $153,704

3,880 5,194 9,300

15,336 44,496 144,404

222 275 319

22,192 52,449 155,657

8,028 10,746 19,242

14,164 41,703 136,415

205 257 301

Your example, with initial

investment of $______ :

Net proceeds from

sale of house.............

Less alternative investment, at___ percent

Net advantage from investment in house. .

Additional saving required each month

(at__ percent interest)

to offset net advantage

of owning1 .................

1 Obtained by dividing the net advantage from investment in

house by factors given and explained in appendix table A-5.

on these savings, in many cases will equal or exceed the 

net proceeds from buying and then selling a house.

For longer periods of time, as in the 5-, 10-, and 20- 

year periods in the illustration, the renter may need to 

supplement the initial saving from downpayment and 

settlement costs with a regular monthly amount to 

maintain parity with the owner.

In 10 years the net proceeds from sale of the house, 

when purchased with an initial investment of $2,900 

(Example A), exceed the alternative investment of the 

same amount invested over the 10-year period by $44,496. 

However, the advantage can be offset, while renting, by 

saving an additional $275 a month. These savings, when 

regularly invested, plus the alternative investment, balance 

the returns when renting with those from ownership 

over the 10-year period. The monthly savings requirement 

in Example B over the 10-year period ($257) is lower than 

for Example A, due to the larger initial investment and 

interest earned ($10,746 compared with $5,194).

Step 6. Estimate the rent level which, in combination with

a savings program, would equal your net monthly shelter

outlay as a homeowner.

The difference between net monthly shelter outlay as 

a homeowner (Step 3) and the amount of monthly savings 

required to offset the gain (or loss) from investing in a 

house (Step 5) is the monthly outlay for rent which would 

leave the renter as well off, from an investment viewpoint, 

as if he had bought a house. In other words, to come out 

even with the homeowner over a period of time, the renter 

can spend for shelter only an amount equal to the difference between his investment program and the homeowner’s 

shelter outlay. Of course, there is no assurance that rental 

shelter will be available in any given locality at a rate which 

makes this possible.

Results for Examples A and B are given on page 15, 

when the net shelter outlay per month is based on tax 

savings for a family of four persons with $25,000 annual 

income. In each case, the monthly saving and the balance 

available for monthly rent equal the net outlay per month 

to own.

The results indicate that the anticipated time interval 

is crucial. Thus, a renter who wanted to break even with 

an owner over a 20-year period would have to save more 

per month and spend less for rent than a renter who wanted 

to break even with an owner over a 5- or 10-year period.

In Example B, the lower net monthly outlay to own is 

due to the larger initial downpayment, which reduces 

the size of the loan required and thereby reduces monthly 

payments. Alternatively, a renter investing an equivalent 

larger initial amount has to save less each month to break 

even with owning, so the monthly rental rate is nearly 

the same in the two examples.

Terms of ownership specified in Steps 1-3 have an important bearing on the outcome. For example, a higher 

mortgage interest rate in Step 1 would increase the gross 

and net monthly outlay to own. This would increase the

14
Step 6. Balance available for monthly rent

Planning period

5 10 20

years years years

From Example A, with income

of $25,000:

Net monthly shelter outlay per

month to own (p. 1 2 ).............$495 $495 $495

Less monthly saving for

alternative investment if

renting (p. 1 4 ).................. 222 275 319

Balance available for monthly

rent......................................... 273 220 176

From Example B, with income

of $25,000:

Net monthly shelter outlay

per month to own (p. 12). . .

Less monthly saving for

alternative investment

475 475 475

if renting (p. 14)...............

Balance available for monthly

205 257 301

rent.........................................

Your example, with income

270 218 174

of $ ________:

Net monthly shelter outlay

per month to own (p. 12). . . ___

Less monthly saving for

alternative investment if

renting (p. 1 4 ).................. .......

Balance available for monthly

rent......................................... .......

balance available for monthly rent for planning periods 

shown in Step 6. Similarly, a lower mortgage interest rate 

would lower the balance available for rent.

Note that, in both examples, calculations are based 

on a 7-percent appreciation for the house (specified in 

Step 4) and a 6-percent net return on alternative investments (Step 5). Changing the expected rate of appreciation, for example to 8 percent, would have increased the 

need for regular savings when renting and lowered the 

balance available for monthly rent. On the other hand, 

increasing the rate of return on alternative investments 

tends to lower the need for regular savings and to increase the balance available for monthly rent.

The results of these ealculations as shown in Steps 1 

through 6 will not, of course, in themselves determine your 

shelter decision, but they may help you, along with other 

considerations, to decide among your alternatives.

One closing note. It is important to remember that, 

over time—

• The personal factors involved in your shelter decision 

change.

• The cost factors involved in your shelter decision 

change.

• The investment factors involved in your shelter decision change.

• General economic conditions and the options available in the shelter market change.

If you keep these factors in mind, you will be far more 

likely to choose wisely when you come to decide whether 

you should rent or buy.

15
Overview of results from the Rent or Buy comparison

Example illustrated Your example

Rent Buy Rent Buy

Preconditions specified:

Planning period............................................................... 10 years

Initial savings or investment........................................... . . $2,900 $2,900

Price of the hom e.......................................................... 52,000

Amount borrowed.......................................................... 49,900

Mortgage interest rate and term .................................... 9%, 30 yrs.

Expected annual rate of appreciation in price of the

home............................................................................ 7%

Annual rate of return on alternative investments. . . . 6%

Starting financial position................................................... . . $2,900 $2,900

Less amounts for home purchase:

Downpayment (p. 9) .............................................. 2,100

Settlement costs (p. 9) ........................................... 800

Equals savings not used for downpayment and

settlement.................................................................... 2,900 0

Net monthly outlay:

To own:

Gross monthly outlay (p. 10).................................... 612

Less tax savings (p. 11)......................................... 117

To rent (p. 1 5 )............................................................... 220

To savings (p. 1 4 )........................................................... 275

Total, net monthly outlay................................................... 495 495

Net proceeds from sale of home:

Sale price (p. 12)............................................................. 102,284

Less selling costs (p. 1 2 )........................................... 8,183

Less mortgage balance owed (p. 1 3 )....................... 44.411

Net proceeds.................................................................. 49,690

Value of savings while renting:

Savings not used for downpayment and settlement,

plus interest (p. 13)..................................................... 5,194

Regular monthly saving when renting plus interest

(p. 1 4 ) .......................................................................... . . 44,496

Total value of savings while renting.................................... . . 49,690

Ending financial position................................................... . . 49,690 49,690

$.

$.
Appendix: Supplementary

tables for analyzing shelter

costs and returns

Cost of financing home loans

Data in table A-l can be used to estimate the amount of 

the monthly mortgage payment for any size of home loan. 

The following example illustrates its use.

EXAMPLE: John Jones needs a $42,500 home purchase 

loan which he can obtain at 9 percent per year for 30 years. 

What are his monthly payments?

ANSWER: $8.05 x 42.5 = $342.13.

Table A-1. Cost to finance $1,000, selected years and rates of interest

Rate

of

interest

Years financed

20 years 25 years 30 years

Monthly

cost

Total

cost

Monthly

cost

Total

cost

Monthly

cost

Total

cost

5 ............................ ..................$ 6.60 $1,584 $ 5.85 $1,755 $ 5.37 $1,933

6 ............................ .................. 7.17 1,721 6.45 1,935 6.00 2,160

7 ............................ .................. 7.76 1,862 7.07 2,121 6.66 2,398

8 ............................ .................. 8.37 2,009 7.72 2,316 7.34 2,642

81/2 ......................... .................. 8.68 2,083 8.06 2,418 7.69 2,768

9 ............................ .................. 9.00 2,160 8.40 2,520 8.05 2,898

91/2 ......................... .................... 9.33 2,239 8.74 2,622 8.41 3,028

1 0 ............................ .................. 9.66 2,318 9.09 2,727 8.78 3,161

1 1 ............................ ..................10.33 2,479 9.81 2,943 9.53 3,431

1 2 ............................ ..................11.02 2,645 10.54 3,162 10.29 3,704

SOURCE: Based on rates published in such sources as Payment Payment Tables, publications Nos. 292 and 392, respectively

Table for Monthly Mortgage Loans and Comprehensive Mortgage (Boston, Financial Publishing Co.).

17
Mortgage payments

The tables presented here help determine the rate at 

which home loans are retired and the percent of mortgage 

payments used to pay interest in selected years.

The following example shows how table A-2 can be 

used:

1. To estimate the amount still owed on a mortgage

after mortgage payments have been made regularly for a

specified number o f years.

EXAMPLE: Lisa Brown just financed $35,000 through 

a 30-year home loan at 914 percent. How much will she 

still owe on the mortgage after 10 years?

ANSWER: $35,000 x .90 = $31,500.

Table A-2. Percent of original loan amount still owed after specified number of years, selected mortgage terms, at different

rates of interest

Interest After After After After After After

rate 5 years 10 years 15 years 20 years 25 years 30 years

Life of mortgage—30 years

5 ....................... .................. 92 81 68 51 28 0

6 ....................... .................. 93 84 71 54 31 0

7 ....................... .................. 94 86 74 57 33 0

8 ....................... .................. 95 88 77 60 36 0

81/2 .................... .................. 96 89 ' 78 62 37 0

91....................... .................. 96 89 79 63 39 0

914.................... .................. 96 90 81 65 40 0

1 0 ....................... .................. 97 91 82 66 41 0

1 1 ....................... .................. 97 92 84 69 44 0

1 2 ....................... .................. 98 93 86 72 46 0

Life of mortgage—25 years

5 ....................... .................. 89 74 55 31 0

6 ....................... .................. 90 76 58 33 0

7 ....................... .................. 91 79 61 36 0

8 ....................... .................. 92 81 64 38 0

814.................... .................. 93 82 65 39 0

9 ....................... .................. 93 83 66 40 0

914.................... .................. 94 84 68 42 0

1 0 ....................... .................. 94 85 69 43 0

1 1 ....................... .................. 95 86 71 45 0

1 2 ....................... .................. 96 88 73 47 0

Life of mortgage—20 years

5 ................................................... . . . 83 6 2 3 5 0

6 ................................................... . . . 85 6 4 3 7 0

7 ................................................... . . . 86 6 7 3 9 0

8 ................................................... . . . 87 6 9 4 1 0

814 ....................... . . . 88 7 0 4 2 0

9 ................................................... . . . 89 71 4 3 0

914 ....................... . . . 89 7 2 4 4 0

1 0 ................................................... . . . 90 7 3 4 5 0

1 1 ................................................... . . . 91 7 5 4 8 0

1 2 ................................................... . . . 92 7 7 5 0 0

1 Percentages at this rate o f interest are used to determ ine the discussed on p . 13.

mortgage balance ow ed on 30-year loans in Exam ples A and B, SOURCE: See table A-1.

18
The following example shows how table A-3 can be 

used:

1. To estimate the amount o f mortgage interest paid in

a given year.

EXAMPLE: Harry Smith has a 30-year, 9-percent loan.

His mortgage payments are $300 per month ($3,600 a 

year). How much of the $3,600 was used to pay interest 

in the first year?

ANSWER: $3,600 x .93 = $3,348.

Table A-3. Mortgage interest as a percent of annual mortgage payments in selected years, selected mortgage terms, at

different rates of interest

Interest 1st 5th 10th 15th 20th 25th 30th

rate year1 year year year year year year

Life of mortgage--30 years

5 ...................................... . . 77 72 64 54 41 24 3

6 ...................................... . . 83 78 71 60 47 28 3

7 ...................................... . . 87 83 76 66 52 32 3

8 ...................................... . . 90 87 80 71 57 35 4

8 > 2 .............................. . . 92 88 82 73 59 37 4

9 ...................................... . . 93 90 84 75 61 39 4

9 /4 .................................... . . 94 91 86 77 63 41 5

1 0 ...................................... . . 95 92 87 79 65 42 5

1 1 ...................................... . . 96 94 89 81 68 44 5

1 2 ...................................... . . 97 95 91 84 71 48 6

Life of mortgage--25 years

5 ...................................... . . 71 64 54 41 24 3

6 ...................................... . . 77 71 60 47 28 3

7 ...................................... . . 82 76 66 52 32 4

8 ...................................... . . 86 81 71 57 36 4

8 1 4 .............................. . . 87 82 73 59 37 4

9 ...................................... . . 89 84 75 61 39 4

9 1 4 .............................. . . 90 86 77 63 41 5

1 0 ...................................... . . 91 87 79 65 42 5

1 1 ...................................... . . 93 89 82 68 45 5

1 2 ...................................... . . 95 91 84 71 48 6

Life of mortgage--20 years

5 ...................................... . . 62 54 41 24 3

6 ...................................... . . 69 60 47 28 3

7 ...................................... . . 75 66 52 32 4

8 ...................................... . . 79 71 57 36 4

8 1 4 .............................. . . 81 73 59 37 4

9 ...................................... . . 83 75 61 39 5

9 1 4 .............................. . . 84 77 63 40 5

1 0 ...................................... . . 86 79 65 42 5

1 1 ...................................... . . 88 82 68 45 5

1 2 ...................................... . . 90 84 71 48 6

1 Only the first-year percentages shown here are used to compare SOURCE: Monthly Payment Direct Reduction Loan Amortizathe investment advantages of owning and renting. tion Schedules, 12th Ed. (Boston, Financial Publishing Co.).

19
Future value of an investment

Table A-4 can be used to determine the future value of 

an initial investment of any given sum, at different rates of 

return and over different time periods. The table may also 

be used to determine the future cost of an item (or group 

of items) whose price is changing by a certain percentage 

each year. The following examples show how table A-4 

can be used:

1. To estimate the future market value o f any house

or property.

EXAMPLE: The current market price for a house is 

$40,000, and it is expected to appreciate 6 percent a year 

over the next 10 years due to price change. What would 

be its price in 10 years?

ANSWER: $40,000 x 1.791 =$ 71,640.

2. J o estimate future value o f a fixed sum o f money

invested at different rates o f return for a given number o f

years.

EXAMPLE: The sum of $5,000 is invested for 20 years 

at a 6-percent return per year. What is the value of the 

$5,000 in 20 years?

ANSWER: $5,000 x 3.207 = $16,035.

3. To estimate the future cost o f any items o f expenditure or expenditures for groups o f items whose

prices are subject to an expected percentage change (increase) each year.

Table A-4. Factors for compounding returns

selected interest rates and time periods

and costs,

Interest

rate

5

years

10

years

20

years

30

years

1 ............ . . . . 1.051 1.105 1.220 1.348

2 ............ . . . . 1.104 1.219 1.486 1.811

3 ............ . . . . 1.159 1.344 1.806 2.427

4 ............ . . . . 1.217 1.480 2.191 3.243

5 ............ ___ 1.276 1.629 2.653 4.322

6 ............ ___ 1.338 1.791 3.207 5.743

7 ............ . . . . 1.403 1.967 3.870 7.612

8 ............ . . . . 1.469 2.159 4.661 10.063

9 ............ . . . . 1.539 2.367 5.604 13.268

1 0 ............ . . . . 1.611 2.594 6.727 17.449

SOURCE: Derived from compound interest tables. For example,

see C.R.C. Standard Mathematical Tables (Cleveland, Chemical

Rubber Publishing Co.).

EXAMPLE: Susan Greene spends $50 a month ($600 a 

year) for utilities, and she expects this outlay to increase 5 

percent a year due to price change. What would her 

monthly utility bill be in 5 years due to this price change?

ANSWER: $50 x 1.276 = $63.80.

Accumulated savings

Table A-5 presents the factors-to be used in estimating 

the total amount of savings accumulated, over varying 

periods of time, by investing a fixed amount of money each 

month at one of three different rates of return. The 

examples below show how the table can be used:

1. To estimate the worth o f a regular program for

saving money.

EXAMPLE: Alan Baker saves $50 each month which 

he invests in a program which he estimates will yield a 

5-percent return compounded annually. If he does this 

each month for 20 years, what will be the approximate 

value of this savings?

ANSWER: $50 x $406 = $20,300. Of this,

$50 x 240 months = $12,000 savings;

$20,300 - $12,000 = $8,300 interest earned.

2. To estimate the monthly savings needed to accumulate a specified sum o f money over a period o f years.

EXAMPLE: Edna Smith wants to accumulate $10,000 

in savings by setting aside a fixed amount each month for 

10 years. If her savings earn 6 percent compounded annually, how much does she set aside each month to acquire 

the $10,000?

ANSWER: $10,000 -F $162 = $61.73.

Table A-5. Factors for use in estimating accumulated

savings, selected interest rates and time periods

Value of savings of $1 per month in

nterest number of years

rate ---------------------------------------------------------------

5 years 10 years 20 years 30 years

4 .........$66 $147 $364 $ 685

5 ................... 68 154 406 815

6 ................... 69 162 453 975

7 ................... 71 171 508 1,169

8 ................... 73 180 569 1,409

SOURCE: See Paul M. Hummel and Charles L. Seebeck, Jr.,

Mathematics of Finance (New York, McGraw-Hill Publishing Co.,

1956, pp. 77-88.

Yield on selected types of investment

Table A-6 can be useful in comparing alternative ways of 

investing a given sum of money.

20
Table A-6. Average annual yield on selected types of investments, 1964-77

(Percent)

Year Aaa corporate

bonds1

(Moody's)

High-grade

municipal

bonds1

(Standard & Poor's)

U.S.

Government

bonds1

Savings accounts

in savings

associations2

1964.................... .................. 4.40 3.22 4.15 4.19

1965.................... .................. 4.49 3.27 4.21 4.23

1966.................... .................. 5.13 3.82 4.66 4.45

1967.................... .................. 5.51 3.98 4.85 4.67

1968.................... .................. 6.18 4.51 5.25 4.68

1969.................... .................. 7.03 5.81 6.10 4.80

1970.................... .................. 8.04 6.51 6.59 5.06

1971.................... .................. 7.39 5.70 5.74 5.33

1972.................... .................. 7.21 5.27 5.63 5.39

1973.................... .................. 7.44 5.18 6.30 5.55

1974.................... .................. 8.57 6.09 6.99 5.98

1975.................... .................. 8.83 6.89 6.98 6.24

1976.................... .................. 8.43 6.49 6.78 6.32

1977.................... .................. 8.02 5.56 7.06 p6.40

1 Economic Report o f the President, January 1978, p. 332. Loan League, 1978), p. 14.

2Savings and Loan Fact Book, 1978 (Chicago, U.S. Savings and p = preliminary.

☆ U 5 . GOVERNMENT PRINTING OFFICE : 1979 0 -2 8 1 -4 1 2 (80>

21
Occupational Outlook

Handbook, 1978-79 Edition

Occupational Outlook

Handbook,

1978-79 Edition

The Occupational Outlook Handbook-published 

every two years—is one of the most widely used 

resources in the field of vocational guidance.

The 1978-79 edition, now available, covers 

several hundred occupations and 35 major industries. 

For each major job discussed, the reader can get 

authoritative information:

What the work is like.

Job prospects to 1985.

Personal qualifications, training, and 

educational requirements.

Working conditions.

Earnings.

Chances for advancement.

Where to find additional information.

Fill out and mail coupon below to

Superintendent of Documents, U.S. Government Printing Office,

Washington, D.C. 20402. Make checks payable to Superintendent of Documents.

Please send__ copies of Occupational Outlook Handbook, 1978-79 Edition (Paper), No. 029-001-02059-7

at $8 a copy. Please send.__copies of Occupational Outlook Handbook, 1978-79 Edition (Cloth), No.

029-001-02067-8 at $11 a copy.

□ Remittance is enclosed. □ Charge to GPO deposit account no. ___________________________

Name

Address

City, State, and Zip Code
Bureau of Labor Statistics

Regional Offices

Region I

1603 JFK Federal Building 

Government Center 

Boston. Mass 02203 

Phone (617) 223-6761

Region II

Suite 3400 

1515 Broadway 

New York. N Y 10036 

Phone: (212) 399-5405

Region III

3535 Market Street 

P O Box 13309 

Philadelphia. Pa 19101 

Phone: (215) 596-1154

Region IV

1371 Peachtree Street. NE 

Atlanta. Ga 30309 

Phone: (404) 881-4418

Region V

9th Floor

Federal Office Building 

230 S Dearborn Street 

Chicago. Ill 60604 

Phone. (312)353-1880

Region VI

Second Floor

555 Griffin Square Building 

Dallas. Tex 75202 

Phone: (214) 749-3516

Regions VII and VIII*

911 Walnut Street 

Kansas City. Mo. 64106 

Phone: (816) 374-2481

Regions IX and X**

450 Golden Gate Avenue 

Box 36017

San Francisco. Calif 94102 

Phone: (415) 556-4678

* Regions VII and VIII are serviced 

by Kansas City

••Regions IX and X are serviced 

by San Francisco