The amount you should pay for a house really depends on rents and interest rates.

Rent and interest are just the same kind of thing. They are what you pay to use something -- either to use a house, or to use money in this particular case, your mortgage.

Interest is the rent you pay for using money that is not yours. To know whether to buy, you just have to compare one rental option to the other.

Even if you use your own money to buy a house, you're still in the rental game, since you're giving up the interest income you could get on your money.

Say you can pay cash for a $250,000 house that would rent for $1,000 per month. Should you buy it? That depends on current interest rates.

$250,000 invested at the current interest rate will produce a certain amount of income for you each year. Right now, you can easily get 5% by investing in CDs with no risk of loss. This means that $250,000 will return $12,500 per year, since $250,000 x 5% = $12,500.

So if you have $250,000 and need a place to live, your choice is between these two options for the coming year:

• Buy the house for $250,000 and don't pay any rent.
• Invest the $250,000 at 5%, and pay $1,000 rent per month to live in a house.

Which one is better? In the first case, you're not getting any investment income, but not paying any rent either. Owning outright means foregoing the opportunity to earn interest. It is an opportunity loss. In the second case, you're getting $12,500 in interest income from your CD's, but paying out $12,000 in rent. $12,500 income - $12,000 rent = $500

So you would be $500 better off in the coming year as a renter.