Hot to Trot: When not to buy a house

So with no debt and a bit of money in the bank, my girlfriend and I got excited with the prospect of owning a house. Our logic was that putting money into a property instead of into rent was always the better choice. We were booked to go see some houses and were about to drop serious money onto a house when my Dad presented some logic that was irrefutable to me.

Annual interest on $270000 mortgage at 5%: $13500
Current rent: $1200x12 = $14400
Additional bills with house ownership: $3000(taxes) + $600(water) = $3600.
Total relevant annual expended money with house ownership: $17100
(left out other bills as we have to pay them regardless of ownership or not)

In other words, we're calculating how much money we pay in either living situation that does not accumulate into net worth. The logic of "paying rent is wasted money" is true, but so is "paying interest to the bank and taxes to the city". At a $270000 mortgage, you're actually spending an extra $2700 annually that does not accumulate into your net worth.

At what mortgage amount would I be saving money VS renting at $1200/month?

Good question. You start saving money at the point where (total yearly expenditure of owning) = (total rent). Let's assume taxes+heat totals $4000/year. Expanding above we get:

(interest) + (taxes and heat) = (rent)
(interest) + ($4000) = $14400
interest = $10400

So as long as your interest is less than $10,400 a year it is worth it for you to buy a house. At 5% this is a $208000 mortgage. At 7% this is a $148,571 mortgage.

Additional savings while renting
We did not address another big difference between a huge debt load (while mortgaging a home) and money in the bank (while renting): Accumulated interest on your savings. Investing that down payment (safely) helps it grow and is a benefit you will not see for a long time once you do take the plunge.

The last factor we might want to weigh in this decision is the current market. While it's true over time that house prices will appreciate, the current economic situation is unstable enough that it's quite possible that house prices will fall, in which case we're much better off renting until our dreams are affordable :)