housing

Before you ever ask 'rent or buy?', there's a more basic question: how much house can you actually afford? The answer almost nobody is taught is that lenders don't cap you by price — they cap your monthly PAYMENT, as a share of your gross income. Two debt-to-income (DTI) ratios do the work: the front-end rule says your housing payment shouldn't exceed about 28% of gross monthly income, and the back-end rule says that payment plus every other debt you carry shouldn't exceed about 36%. Whichever is lower is your real budget — and everything else, including the price tag you can shop for, is worked backwards from it. This lesson inverts the mortgage math so you can drag your income, down payment, rate, and existing debts and watch the affordable price move. Two truths jump out. First, the interest rate is the hidden lever: at the same income, a few points of rate can swing your price by tens of thousands of dollars, because you're buying a payment, not a number. Second, your other debts come straight out of your housing budget through the 36% rule — a car loan or student-loan payment doesn't just cost its own dollars, it quietly shrinks the house you qualify for. Knowing the real number before you shop keeps you from falling in love with a home a lender will never approve — or, worse, one they will approve that leaves you 'house poor.'

The most repeated piece of housing advice — 'stop throwing money away on rent and buy' — quietly assumes the answer. The honest framing is a break-even: how many years must you stay in a home before owning beats renting and investing the difference? Both paths start with the same money. The buyer sinks the down payment plus closing costs into the home; the renter invests that exact same cash. Each month, whoever pays less to keep a roof overhead invests the difference, so the comparison is apples-to-apples: the renter is not just 'wasting' rent, they are renting and investing everything they didn't spend on owning. Two forces decide the winner. Transaction costs — the closing costs to buy and the agent commission to sell — put the buyer behind on day one, often by close to a tenth of the home's value round-trip. Then time works for the buyer: the mortgage amortizes into equity, the home appreciates, and rent ratchets up every year while the owner's principal-and-interest payment stays fixed. So the buyer starts behind and slowly catches up, crossing the renter's net worth at the break-even year. Stay past it and buying wins by more and more; sell before it and renting plus investing was the better call. The simulator races a buyer's net-worth-if-sold against a renter's invested portfolio and marks exactly when — and whether — buying pulls ahead. The durable lesson: buying is a bet on staying put. The shorter your horizon, the higher mortgage rates are, and the lower the rent relative to the price, the longer that break-even — and the more renting and investing wins.

Once you've decided to buy, the next decision is the loan itself — and the most misunderstood lever on it is discount points. A point is cash paid at closing, conventionally 1% of the loan, that buys your interest rate down a notch. A lower rate means a smaller monthly payment and less interest over the life of the loan, so points look like a pure win. They aren't free, though: you hand over the money today, while the savings dribble back a little every month. That makes buying down your rate the same shape of decision as renting versus buying — a break-even that hinges on how long you stay. The break-even is simply the up-front cost divided by the monthly saving: pay $8,000 in points to cut your payment by about $130 a month and you start ahead only after roughly five years. Keep the loan past that point and the points were a bargain; sell the house, refinance, or pay the loan off early before then and you'd have been better off keeping the cash and taking the higher rate. The simulator plots the running net position of paying for points: it starts underwater by the cost of the points, climbs as the lower payment saves money each month, and crosses into the black at the break-even. The exact same arithmetic governs refinancing — closing costs paid now against a lower payment later — so the mental model you build here transfers directly. The durable lesson: a lower rate is worth paying for only if you'll keep the loan long enough to collect the savings.

A fixed-rate mortgage locks one payment for 30 years; an adjustable-rate mortgage (ARM) starts lower and then changes. The number that names it — 5/1, 7/1 — tells you the deal: the first figure is how many years the low 'teaser' rate is fixed, the second how often it adjusts after that. When the rate adjusts, the loan re-amortizes — the remaining balance is spread over the remaining term at the new rate — so a higher rate means a higher payment, often a sharply higher one. Where does the new rate come from? A published index (a market rate) plus a fixed margin the lender sets, together the 'fully-indexed rate.' Caps limit the damage: a typical 2/2/5 structure means the first adjustment can move the rate at most 2 points, each later one at most 2 points, and it can never rise more than 5 points above where it started. The appeal is real — for the intro years you pay less than a comparable fixed loan, sometimes much less. The risk is just as real: when the teaser ends, the payment can leap, and the early savings get eaten if you keep the loan long enough. That makes an ARM a bet — that you'll sell or refinance before the reset catches up, or that rates will fall instead of rise. The simulator races an ARM's monthly payment against the fixed loan you could take instead: a flat line for fixed, a teal staircase for the ARM that sits low through the teaser, then steps up at each reset. The crossover — where the ARM's running cost overtakes the fixed loan's — is the hidden break-even. The durable lesson: the rate on the billboard is the teaser, not the loan; an ARM only wins if you collect the discount and get out before the reset bites.